Markets soar on Fed speculation

North American shares rose sharply Tuesday amid speculation the U.S. Federal Reserve will signal on Friday new moves to spur the American economy.

Fed chairman Ben Bernanke is to make a key speech during an annual economics conference in Wyoming on Friday.

The bank already pledged to maintain its super-low interest rates until at least 2013 but some economists are calling for a third round of massive bond-buying to pump money into the faltering U.S. economy.

In the latest sign of a struggling American economy, the Commerce Department said U.S. new home sales fell 0.7 per cent in July for the fourth straight month.

In Toronto, the S&P/TSX composite index closed up 270.08 points, or 2.2 per cent, at 12,338.33.

In New York, shares rose for a second day after the largest four-week loss since March 2009.

The Dow Jones industrial average was up by 322.11 points, or three per cent, to 11,176.76. It briefly gave back more than 70 points of its gains for about eight minutes as an earthquake centered in Virgina shook New York shortly before 2 p.m. ET but then continued its climb.

The S&P 500 index rose 38.53, or 3.43 per cent, to 1,162.35. The Nasdaq rose 100.68, or 4.29 per cent, to 2,446.06.

Gold down $30 US

Gold retrenched after a string of record high closes. December bullion closed down $30.60, or 1.6 per cent, at $1,861.30 US an ounce after crossing above $1,900 Monday, and lost another 34 dollars in electronic trading later on Tuesday.

The Canadian dollar closed at 101.21 cents US, up 0.21 of a cent.

The October crude contract on the New York Mercantile Exchange gained $1.02 to $85.44 US a barrel after running ahead almost $2 on Monday.

Greg Ip, economics editor for The Economist, told CBC News he's skeptical that Bernanke will signal dramatic moves.

"There's a lot of anticipation associated with his speech but I think that people need to tamp down their expectations somewhat," he said, especially given the bank has already pledged to keep rates low into 2013.

"That was a pretty big step for them," Ip said. For the chairman of the Fed to foreshadow even more steps just two weeks after that, without some more signs of a dramatic downturn, "would be unusual."