Crude oil reached $100 a barrel and gold soared to a record high yesterday, leading a surge in commodities as the dollar's slump against major currencies enhanced the appeal of raw materials as hedges against inflation.
Gold climbed to $860.10 an ounce and wheat and soybeans jumped more than 3 per cent.
The dollar fell on speculation the Federal Reserve will cut borrowing costs in an attempt to bolster the US economy.
The catalyst for much of the day's action came from a weak manufacturing report from the US Institute for Supply Management.
The headline index fell to 47.7 last month, the lowest level since April 2003, compared with expectations for a modest increase from November's 50.8. A reading below 50 indicates a manufacturing contraction.
"Overall, this is a seriously weak report, though the headline is still not quite at recession levels," said Ian Shepherdson, chief US economist at High Frequency Economics, "but it is far too close for comfort and it reinforces our view that the Fed has a lot more easing to do."
Ulster Bank chief economist Pat McArdle said there was a specific reason for the latest spike in the price of oil - political unrest - and that the consensus among economists was that oil would average closer to $80 a barrel in 2008.
"But that doesn't rule out spikes like this one. This shows that the supply and demand for oil is on a knife-edge. Even if oil doesn't stay at $100 a barrel, it will stay at elevated levels of $80-$100 a barrel," Mr McArdle said.
Crude oil rose on concern that violence may further cut output in Nigeria, Africa's biggest producer, and on speculation US petroleum inventories fell for a seventh week.
Natural gas and heating oil prices also climbed and platinum jumped to a record. The dollar fell as much as 1 per cent against a basket of six major currencies.
Stephen Flood, director of Dublin-based firm Gold Investments, said the latest jump in gold prices might be short-lived, but that the long-term fundamentals for rising gold prices remained solid, as the outlook for the global economy becomes gloomier.
Gold gained as rising energy costs boosted the metal's allure as a hedge against inflation. But it is economic uncertainty, as well as the weak dollar, that is pushing people toward the metal and other commodities.
"Gold is a barometer of risk in the world," Mr Flood said. "Central banks are in a very difficult position. They need to raise interest rates to control inflation, but they need to let them fall to save the banks."
Crude oil futures for February delivery rose $3.228, or 3.4 per cent, to $99.20 a barrel at 12:31pm on the New York Mercantile Exchange.
The previous record was $99.29 on November 21st.
"The most salient buzz word in 2008 is going to be inflation," said Michael Pento, senior market strategist for Californian financial firm Delta Global Advisers.
"The Fed is lowering interest rates and vastly increasing the money supply. They're further fuelling inflationary expectations."
The Fed reduced the overnight lending rate three times since September 18th from 5.25 per cent to 4.25 per cent on concern a housing slump will lead to a slowdown in the US economy.
Some investors buy commodities to hedge against rising consumer prices, so the falling dollar makes raw materials priced in the US currency cheaper for buyers holding other currencies. - ( Additional reporting: Bloomberg, Financial Times service)
