Gold dips on stronger dollar after ECB tapers asset buys

By Eric Onstad

LONDON (Reuters) - Gold retreated into the red on Thursday after the dollar rebounded on the back of the shock decision by the European Central Bank to reduce its asset purchases.

Gold, slightly firmer before the ECB statement, fell after the bank said it would reduce its asset buys to 60 billion euros ($64 billion) from next April from the current 80 billion euros.

The dollar index reversed following the decision and moved into positive territory, making dollar-denominated gold more expensive for holders of other currencies.

Spot gold was down 0.2 percent at $1,171.61 an ounce by 1320 GMT and U.S. gold futures fell 0.3 percent to $1,173.90 an ounce.

Bullion has shed more than 12 percent from its post-U.S. election peak of $1,337.40 on Nov. 9.

"If the ECB has the ability to trigger euro-dollar weakness again, and it breaks under the key 104.58-105 level, then you'll get the next phase of a dollar rally, which will be painful for gold," said Georgette Boele, ABN AMRO commodity strategist in Amsterdam.

The euro gave up all its daily gains after the ECB move and fell 0.2 percent to 107.31 against the dollar.

Also weighing on gold were strengthening expectations that the Federal Reserve may increase interest rates in its policy meeting next week, as rising U.S. rates raise the opportunity cost of holding non-yielding bullion.

Interest rates futures implied traders saw a 95 percent chance that the Fed would raise rates at its policy meeting next Tuesday and Wednesday, CME Group's FedWatch program showed.

"As we head into the FOMC, it is certain that the Fed will raise rates this time. I believe this is mostly priced into gold. We might still see some reaction and the recent low of $1,157 may be revisited again," said Brian Lan, managing director at Singapore-based gold dealer GoldSilver Central.

Gold may get support, however, following the Fed decision as investors take profits and close books for the year, but this would only be temporary before a fresh bout of weakness for gold in the new year, Boele added.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, dropped 0.72 percent to 863.67 tonnes on Wednesday from Tuesday. Holdings have fallen more than 8 percent since November.

Silver fell 0.2 percent to $17.07 an ounce after rising over 2 percent in the previous session.

Platinum rose 0.5 percent to $940.40, while palladium fell 1.5 percent to $721.90 per ounce.

($1 = 0.9344 euros)

(Additional reporting by Nallur Sethuraman and Swati Verma in Bengaluru; editing by Susan Thomas and Elaine Hardcastle)