CURRENCY : Dollar Gains and Gold Drops as Oil Prices Fall

Gold prices tumbled and the dollar firmed in foreign exchange trading Tuesday in response to another sharp drop in oil prices.

At the Republic National Bank of New York, gold bullion was bid at $483.25 an ounce at 4 p.m. EST, off $12.25 from Monday’s late price.

The dollar made slight gains against most other world currencies after a shaky start overseas.

Analysts said inflation worries in the metals and currency markets had been dampened by the slide in spot oil prices, which lowered the price of the benchmark West Texas Intermediate crude by 81 cents to $16.63 per 42-gallon barrel.

The benchmark price has lost $1.68 over the last two days.

Oil price began falling sharply Monday after the Organization of Petroleum Exporting Countries, beset by internal squabbling, agreed to a makeshift six-month extension of its current prices and production quotas.

The news was bearish for both oil and gold prices in the near term, analysts said.

“Information like that is going to test the gold market,” said Sharon Ziemian, a precious-metals analyst for Citibank.

But she added that the big drop in gold was not “super dramatic” considering the strong anti-inflation signal flashed by the oil market.

The dollar, meanwhile, appeared to strengthen at gold’s expense, although some analysts were reluctant to draw direct ties. They said the dollar had simply exhausted its downward momentum since the release of last week’s disastrous report on the U.S. trade deficit, which showed the shortfall hit a record $17.6 billion in October.

The U.S. currency may have strengthened on short-covering as some traders squared positions before year’s end. In a short sale, traders sell borrowed dollars in anticipation of buying them back later at a profit. As the dollar’s value bottoms out, traders may be trying to cover their short positions, the analysts said.

The dollar slipped to a new low of 126.95 Japanese yen from 128 yen in Tokyo despite heavy intervention by the Bank of Japan to buy dollars. Later in London, the dollar closed slightly higher at 127.40 yen, and in New York, it bubbled to 127.60, compared to 127.995 late Monday.

In London, the British pound fetched $1.8310, cheaper than $1.8390 late Monday. In New York, the pound was quoted at $1.8295, down from $1.8385.

Other late dollar rates in New York, compared to late Monday, included: 1.6315 West German marks, up from 1.6305; 1.3305 Swiss francs, up from 1.3270; 5.5325 French francs, up from 5.5265; 1,204.50 Italian lire, up from 1,201.50, and 1.30875 Canadian dollars, up from 1.30655.

Late dollar rates in Europe included: 1.6305 West German marks, up from 1.6236; 1.3250 Swiss francs, up from 1.3240; 5.5205 French francs, up from 5.5115; 1.8330 Dutch guilders, up from 1.8275; 1,200.50 Italian lire, up from 1,197.75, and 1.3062 Canadian dollars, down from 1.3075.

Gold prices, which failed to hold at the $500-an-ounce level reached Monday, fell about $10 an ounce in Europe. Gold fell in London to a late bid price of $489 from $499. It closed in Zurich at $489.50, down from $500.

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