By Pham-Duy Nguyen Dec. 16 (Bloomberg) -- Gold prices extended a rally to the highest in more than two months after the Federal Reserve cut U.S. borrowing costs, driving the dollar lower and boosting the appeal of the precious metal as an alternative investment. The Fed cut the benchmark lending rate to a “target range” of zero to 0.25 percent from 1 percent. Policy makers said in a statement that the Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” The dollar fell as much as 2.1 percent against a basket of six major currencies. “The dollar is going to the sewer, and this is highly bullish for gold,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “The Fed is going to put as much liquidity into the system as it takes, but at the end of the day, what’s their exit strategy? It’s a huge inflationary bubble.” Gold futures for February delivery rose as high as $857.50 in electronic trading on the Comex division of the New York Mercantile Exchange, the highest for a most-active contract since Oct. 15. The price settled at $842.70 at the end of floor trading, up $6.20. The metal traded at $852.80 at 3:11 p.m. Gold jumped to a record $1,033.90 on March 17. Rate cuts sent the dollar to an all-time low against the euro in July. To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

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