March 2, 2020 / 4:17 AM / 3 months ago

PRECIOUS-Gold rises 1% as virus risks boost rate cut hopes

(Adds graphic, updates prices)

* Traders expect 75 basis point rate cut by Fed -FEDWATCH

* China factory activity contracts at fastest pace ever in Feb

* U.S. 10-year Treasury yields fall to record low

* GRAPHIC-2020 asset returns:

By K. Sathya Narayanan

March 2 (Reuters) - Gold rose more than 1% on Monday, rebounding from a steep decline across precious metals in the previous session, amid investor hopes the U.S. Federal Reserve will cut interest rates to cushion the impact of the fast-spreading coronavirus.

Spot gold gained 1.2% to $1,603.19 per ounce by 0904 GMT. U.S. gold futures rose 2.5% to $1,606.00.

Gold prices plunged over 4.5% on Friday, with precious metals joining a broader market selloff as investors liquidated positions to meet margin calls in other assets.

“On Friday, the U.S. Federal Reserve board hinted they’re going to be dropping interest rates and that’s a great thing for gold right off the bat,” said Stephen Innes, chief market strategist at financial services firm AxiCorp.

Fed Chair Jerome Powell said that while the U.S. economy remained strong, the coronavirus “posed an evolving risk” and the central bank stood ready to take action if needed.

Lower interest rates reduce the opportunity cost of holding non-yielding bullion.

Fed fund futures showed that traders expect a 75 basis point rate cut by the U.S. central bank at its March monetary policy meeting.

“The dollar is weaker, the euro strengthened, and this (suggests) gold will go up,” Innes said, adding the negative correlation between the U.S. currency and the yellow metal has materialised again since the dollar’s safe-haven appeal has faded.

Benchmark U.S. 10-year Treasury yields fell to a record low, while the Japanese yen rose to its highest against the dollar since October.

Meanwhile, factory activity in China contracted at the fastest pace ever in February, even worse than during the global financial crisis, data showed on Saturday, highlighting the damage from the outbreak.

Other metals also regained some ground following Friday’s free fall, with palladium rising 2.8% to $2,666.92 per ounce after shedding as much as 13% on Friday - its biggest one-day percentage decline since the 2008 financial crisis.

Gains in palladium and platinum are temporary as the metals are plagued by demand risks from industries including automobile due to the coronavirus epidemic, said Ajay Kedia, director at Kedia Commodities in Mumbai.

Platinum gained 1.7% to $878.63, while silver rose 1.9% to $16.98, after both metals fell to their lowest in about six months in the previous session.

Reporting by K. Sathya Narayanan in Bengaluru; Editing by Maju Samuel; Editing by Kirsten Donovan and Emelia Sithole-Matarise

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