Gold futures closed at their highest level since December 1988 as declines in the US dollar against the yen and the euro boosted the metal's appeal as a store of value.

The US dollar had its biggest drop versus the euro in two weeks after a Chicago-area manufacturing index fell.

"When the euro goes up, that means our products become more expensive and that's inflationary to us," said Carl Birkelbach, chief executive officer of Birkelbach Investment Securities.

"I look at gold as a hedge against inflation, and prices are rising all over the place, wherever you look, from your sandwich to your gasoline."

In other markets, crude oil fell after US inventories surged to the highest since August 2002. The energy-weighted Goldman Sachs Commodity Index dropped 1.22 to 282.12.

Gold has risen 26 per cent in the past year, partly because of the US dollar's slump. A falling US dollar makes European imports more expensive for US consumers.

Gold for June delivery rose $US5.50, or 1.3 per cent, to $US428.30 an ounce on the Comex division of the New York Mercantile Exchange, the highest for a most-active contract since December 6, 1988. The metal has climbed 2.9 per cent this year.

Mr Birkelbach said he expected gold to rise to $US500 an ounce later this year and had told clients to buy shares in Barrick Gold, the world's third-largest gold producer by 2002 output.

The National Association of Purchasing Management-Chicago said its gauge of regional manufacturing dropped to 57.6 in March from 63.6 in February. Even so, the measure has remained above 50, which indicates expansion, since May. A separate report showed that orders placed with US factories increased a less than expected 0.3 per cent in February.

Oil stockpiles jumped 5.7 million barrels to 294.3 million in the week ended Friday, the Department of Energy said. Supplies were 4.9 per cent higher than a year earlier. The report came after Opec said it would cut output quotas starting tomorrow by 1 million barrels a day.

Some members said prices were high because of speculation in the market, not because of low supply.

"The crude numbers are looking healthy," a broker with Starsupply Petroleum, Justin Fohsz, said.

"Opec agreed to cut output, but the news had been priced in yesterday. We are paying more attention to inventories."

Crude oil for May delivery fell 49¢, or 1.4 per cent, to $US35.76 a barrel on the Nymex. Prices were up 15 per cent from a year earlier when US forces were attacking Iraq's Republican Guard units defending cities outside Baghdad.

Ministers from countries including Saudi Arabia and Algeria have expressed concern that oil prices may decline in the next three months as demand slows with warmer weather in the northern hemisphere.