Gold erases early losses after dollar slides on BOJ

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold erased early losses to trade flat on Thursday, as the U.S. dollar slumped 2 percent against the yen after the Bank of Japan surprised markets by keeping monetary policy steady.

At a two-day rate review ending on Thursday, the BOJ decided to maintain its pledge to increase base money at an annual pace of 80 trillion yen ($732 billion). It also left unchanged a 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park at the BOJ.

The yen soared against the dollar and euro after the announcement, as investors unwound bets that the central bank would loosen monetary policy again.

Spot gold had ticked up 0.1 percent to $1,247.40 an ounce by 0411 GMT, after dropping 0.7 percent earlier in the session.

Traders said the metal was tracking the dollar/yen move after a Federal Reserve statement on Wednesday that provided few clues on the U.S. central bank's monetary policy outlook.

The Fed kept the door open for an interest rate hike in June, although it indicated it was in no hurry to take such a step. The U.S. central bank said the labour market was improving but acknowledged that economic growth seemed to have slowed.

"The longer the Fed holds off on raising rates, the better for gold," said HSBC analyst James Steel. "The bullion market will now focus on the prospects of a Fed hike at the next meeting in June, and the possibility that the Fed will tighten later this year may help cap bullion prices."

Investors see a 23-percent probability that the Fed's overnight lending rate will rise in June, according to CME's FedWatch group. U.S. short-term interest rate futures reflect the expectation the Fed will wait until September before raising rates.

Gold has rallied 17 percent this year on expectations that the Fed will not raise rates aggressively this year due to global economic risks. The U.S. central bank raised rates in December for the first time in nearly a decade.

Gold is highly sensitive to rising interest rates, which lift the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.

U.S. GDP data due later in the session will be eyed for trading cues. Economic growth likely stalled in the first quarter as domestic demand cooled and a strong dollar continued to undercut exports, but a pick-up in activity is anticipated given a buoyant labour market.

"The short-term outlook for gold will now be heavily influenced by domestic data releases in the U.S.," ANZ said.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford)