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Gold and stocks drop on political anxiety

The dollar strengthened on Wednesday, as investors dealt with the political turmoil in France and Japan. Meanwhile, a prolonged U.S. shutdown pushed gold spot prices above $4,000 an ounce for the very first time.

Gold prices have been driven higher by the prospect of rate cuts in the future from Federal Reserve, and demand for safe havens due to economic and politics worries. Gold spot prices rose by 1%, to $4,021.22 an ounce. This brings the gains this year above 50%.

Gold is traditionally seen as a safe haven during times of uncertainty. This rally was also driven by central bank purchases, the inflows of money into gold ETFs, and a weaker dollar.

Chris Weston is the head of research for Pepperstone.

Thierry Wizman is a global FX & Rates Strategist at Macquarie Group. He said that gold's rally was a collective "hedge" to the potential failure of the American AI driven tech boom.

"A collapse in that optimistic 'vision,' could trigger an inflationary solution for the world's overhang of sovereign debt rather than a product-based resolution."

MSCI's broadest Asia-Pacific share index outside Japan, which tracks Wall Street's decline, fell 0.8% in stocks. It is now a little lower than the high of 4-1/2 years it reached on Tuesday.

China and South Korea closed their markets for a long weekend. Hong Kong's Hang Seng Index has fallen 1%. Japan's Nikkei Index fell 0.35% after reaching a record high in the previous session.

FRENCH WORRIES IS BACK

The euro was under pressure following the resignation of French Prime Minister Sebastien lecornu on Monday. This signals yet another period in France's political history.

The euro fell 0.35% to $1.1617 last week, its lowest level since a month. France's president Emmanuel Macron was under increasing pressure to resign and hold a snap parliamentary elections.

Investors are worried about France's fiscal stability due to the political chaos that has engulfed the country. Five prime ministers have resigned in less than two year.

The yen has also fallen this week due to political shifts. It is now at its lowest level in eight months as investors wait for fiscal policy signals from Prime Minister-in-waiting Sanae Takayichi. Last time, it was 152.40 dollars per yen.

The victory of Takaichi, the fiscal dove, over the weekend sparked concerns about the outlook for fiscal and monetary policies. Traders quickly cut their bets against another hike in this year.

The yen has fallen over 3% in the past week. This is on track to be the steepest weekly drop since last year. This raises fears of a possible intervention by Japanese authorities.

Hirofumi Suzuki, chief currency strategist of SMBC, stated that if the yen headed towards 160 in one to two weeks "FX interventions by the Japanese Government would be viewed more likely."

He said that he expected an impact to be felt on U.S.-Japan's trade relations in the medium and long term.

The New Zealand dollar fell nearly 1% following the central bank's 50 basis point cut to its benchmark rate and the fact that it left the door open to further easing. This suggests policymakers are worried about the fragile state of the economy.

Investors have relied on independent secondary data and remarks by monetary policymakers to determine the likelihood of the Fed implementing its second rate reduction this year at the policy meeting scheduled for this month.

The traders are estimating a 45 basis point easing in this year.

The dollar index (which measures the U.S. dollar against six other currencies) hit its highest level in August. However, sentiment was still gloomy as the shutdown entered its eighth day.

Investors brushed aside fears of oversupply on Wednesday, after digesting a decision by OPEC+ earlier to limit production increases in the coming month.

Brent crude futures rose 0.7% to $65.91 per barrel. U.S. West Texas Intermediate Crude 0.79% to $60.22 (Reporting and editing by Ankur Banerjee, Sam Holmes).

(source: Reuters)