Gold hits 10-month low as Fed signals faster rate hikes in 2017

By Marcy Nicholson and Eric Onstad

NEW YORK/LONDON (Reuters) - Gold turned lower and tapped the lowest in more than 10 months on Wednesday, after the Federal Reserve raised U.S. interest rates by a quarter point and signalled a faster pace of increases next year, causing the U.S. dollar to rally.

The Fed ended its two-day meeting with a statement that was more hawkish than expected in the wake of a string of generally strong economic reports and as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.

The rate hike to between 0.5-0.75 percent was expected.

"There is some optimism built into the outlook, as the 'dot' forecast now projects one more rate hike in 2017 than was previously the case in order to keep growth at essentially the same pace as previously projected," said Avery Shenfeld, chief economist for CIBC Capital Markets in Toronto.

"We still see five quarter point hikes over the next two years, but now see three in 2017 and two in 2018 versus our earlier call of two and three, seeing the Fed being a bit more preemptive in anticipation of some fiscal stimulus."

Higher U.S. rates raise the opportunity cost of holding non-yielding bullion and normally weigh on gold, but markets had already priced in a December rise.

Spot gold was down 0.3 percent at $1,154.62 an ounce by 2:43 p.m. EST (1943 GMT), after falling to the lowest since Feb. 5 at $1,149.66, as yields on shorter-dated Treasuries hit their highest in more than five years.

U.S. gold futures settled up 0.4 percent at $1,163.70 prior to the Fed's statement.

"A more hawkish than expected dot plot projection has lifted short-term rates considerably and slapped gold to fresh lows," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York.

"The immediate outlook is bleak, though intransigent bulls may take comfort in that there shouldn't be many longs left in the market to stop out."

The dollar index , which measures the greenback against a basket of currencies, turned higher after the statement, rising around 0.5 percent.

Data prior to the Fed statement showed U.S. retail sales barely rose in November, while U.S. industrial production fell more than expected.

Silver was up 0.5 percent at $16.99 an ounce, platinum was down 0.1 percent at $931.25 and palladium dipped by 0.07 percent at $728.50.

(Additional reporting by Swati Verma in Bengaluru; Editing by David Goodman and Chizu Nomiyama)