Gold drops to three-month low on U.S. rate expectations

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold fell to a fresh three-month low on Tuesday on renewed expectations of a mid-year hike in U.S. interest rates and as the dollar scaled a 11-year peak.

Spot gold dropped to $1,159 an ounce, its lowest since Dec. 1, before paring some losses to trade down 0.4 percent at $1,161.65 by 0730 GMT.

Gold took a hit from Friday's strong U.S. nonfarm payrolls data that boosted expectations the Federal Reserve would begin increasing interest rates by the middle of the year.

The Fed, which has kept rates at near zero since December 2008, has signalled that it is prepared to raise rates later this year, with June to September the expected time frame.

Higher rates could dent demand for assets that do not pay interest such as gold, and boost the dollar, which on Tuesday climbed to its highest since September 2003 against a basket of major currencies, denting bullion's safe haven appeal.

"Gold will continue to be weighed down near term by the strong U.S. payrolls from Friday," said ANZ analyst Victor Thianpiriya.

Comments from a top Fed official added to worries over a rate hike. Richard Fisher, president of the Dallas Federal Reserve Bank, said the U.S. central bank should promptly end its easy monetary policy and press ahead with an interest rate hike.

Charts were also not in favour of gold, with technical analysts predicting the next support level for gold at $1,150.

For further trading cues, investors were eyeing talks over the Greek debt crisis, where prolonged uncertainty could help safe-haven bullion.

Finance experts from Greece will open talks about economic reforms on Wednesday with officials from the European Union, the European Central Bank and the International Monetary Fund.

The ECB's Governing Council is set to hold a teleconference on Thursday to discuss extending emergency liquidity assistance for Greek banks.

"Unless the situation surrounding Greek's debts take a huge turn for the worse, the bearish sentiment engulfing gold currently will likely triumph over any mild safe haven appeal the precious metal is exhibiting," said Howie Lee, analyst at Phillip Futures.

Investor positioning indicated a bearish outlook. Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.43 percent to 753.04 tonnes on Monday, their lowest in more than a month.

(Reporting by A. Ananthalakshmi; Editing by Richard Pullin, Jacqueline Wong and Biju Dwarakanath)