Gold drops on firm dollar as March rate hike bets rise

By Sethuraman N R

REUTERS - Gold prices slipped on Thursday as the dollar firmed on hawkish comments from U.S. Federal Reserve officials that stoked expectations of a U.S. interest rate hike in March.

Spot gold fell 0.2 percent to $1,246.14 per ounce by 0255GMT. On Monday, the metal rose to $1,263.80, its highest since Nov. 11.

U.S. gold futures fell 0.3 percent to $1,246.60.

The dollar index, a measure of the greenback against a basket of six other major currencies, was up 0.1 percent at 101.910. On Wednesday, it reached 101.97, the highest since Jan. 11.

Higher U.S. interest rates would diminish demand for non-interest bearing gold while a higher dollar makes the yellow metal more expensive for buyers using other currencies.

"Much of the recent strength we are seeing in the dollar is more attributable to an abrupt about-face in terms of what the markets are expecting from the Federal Reserve's March meeting," said INTL FCStone analyst Edward Meir.

Despite the hawkish rate backdrop, gold has been performing impressively considering that the U.S. equity markets also surged to new highs, Meir added.

The Dow Jones Industrial Average blasted through the 21,000-point mark for the first time. Both the Dow and the S&P 500 rallied around 1.4 percent.

U.S. consumer spending cooled in January as demand for automobiles and utilities fell, but inflation recorded its biggest monthly increase in four years, another reason for the Fed to hike interest rates this month.

Fed Governor Lael Brained on Wednesday said that it may be "appropriate soon" to raise interest rates as the global economy seems to have turned a corner.

More Fed policy-setters, including Chairwoman Janet Yellen and Vice Chairman Stanley Fischer, will speak on Friday, likely providing further signals on the Fed's policy path ahead of the March 14-15 meeting.

Spot gold may retest a resistance at $1,252 per ounce, a break above which could lead to a gain to the next resistance at $1,258, according to Reuters technical analyst Wang Tao.

"If we look at gold's performance over the course of the last five trading sessions, prices have hardly dropped at all, telling us that funds remain committed to the precious metal in light of what they view to be an uncertain U.S. legislative outlook," Meir said.

"In addition, funds do not want to get too short ahead of the critical French elections."

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.28 percent to 843.54 tonnes on Wednesday from 841.17 tonnes on Tuesday.

Spot silver fell 0.2 percent to $18.38 an ounce.

Platinum was down 0.2 percent at $1,012.70, while palladium dropped 0.2 percent to $773.50.

(Reporting by Nallur Sethuraman in Bengaluru; Editing by Joseph Radford and Christian Schmollinger)