Gold plummets on dollar strength

Gold sunk below $1,000 as the lower-than-expected rate cut sent the dollar sharply higher Tuesday.

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NEW YORK (CNNMoney.com) -- Gold prices sunk below $1,000 Tuesday as the dollar roared back after the Federal Reserve's announcement that it would cut a key interest rate by three-quarters of a percentage point

The markets had been anticipating a full-point cut.

COMEX gold for April settled at $1,004.30 an ounce in floor trading Tuesday. But after the Fed announcement, the commodity lost $24.70 to $977.80. Gold settles at 1:30pm ET, but it continues to trade electronically around the world.

A sharp rise in the dollar gave investors hope that the economy is due for a turnaround, helping to send gold prices lower. Traders sold their gold, which they have stockpiled as a hedge against the sinking dollar, and bought stocks. The stock market saw impressive gains Tuesday, closing up 420 points.

"Investors saw the very, very strong dollar movement, which made them think that maybe we are heading towards a recovery," said Mark Hansen, director of trading at commodities firm CPM group.

The dollar moved higher against several major currencies Tuesday as the Fed's decision to lower the federal funds rate by only three-quarters of a percentage point was a disappointment for some investors who were hoping the central bank would act more aggressively by cutting rates by a full percentage point.

The 15-nation euro traded at $1.5715, down from $1.5731 late Monday. But prior to the Fed's decision to cut interest rates, the euro was trading $1.5792. The dollar also moved higher against the British pound.

"Investors are looking to take profits if the dollar stabilizes," said Hansen, who believes that gold could correct to $910 if the Fed is successful in boosting the economy.

Gold has risen sharply in the past weeks, hitting a record $1,033.90 Monday, as investors poured their money into gold to ward off inflation.

But when the economy ends its current downturn, gold prices should eventually fall, as they did 28 years ago. After hitting the $847 mark in January 1980, gold futures fell 70% to $253 in August 1999.

But if the dollar does not continue to grow stronger, worried investors could buy up gold again like in 1980. Gold is near record highs now, but the $847 level 28 years ago would be worth $2,170 in today's dollars, more than double gold's current price.