Gold falls 1 pct as dollar rises on Fed rate expectations

By Clara Denina

LONDON (Reuters) - Gold fell 1 percent on Thursday to a near a 5-1/2-year low as the dollar rose after data showed the U.S. economy improved in the second quarter, supporting views the Federal Reserve would lift rates by year-end.

The U.S. Commerce Department said gross domestic product expanded at a 2.3 percent annual rate. First-quarter GDP, previously reported to have shrunk at a 0.2 percent pace, was revised up to show it rising at a 0.6 percent rate.

Spot gold dropped as much as 1.3 percent to a session low of $1,081.85 an ounce in earlier trade, not far from its cheapest since February 2010 at $1,077 hit after a selloff on July 20. It dropped 1.1 percent to $1,084.21 by 1337 GMT.

"$1,080 and $1,050 are critical technical support levels. I don't know if there are big stops below there but the market is nervous about a further bear raid and prices remain under pressure," bullion broker Sharps Pixley head Ross Norman said.

After a two-day meeting, Fed policymakers said the economy had overcome a first-quarter slowdown and was "expanding moderately". A Reuters poll showed the U.S. economy may have rebounded in the second quarter.

That buoyed the dollar, up 0.4 percent against a basket of leading currencies, making dollar-priced gold more costly for non-U.S. buyers.

U.S. gold for August delivery slipped 0.8 percent to $1,083.90 an ounce.

"The Fed yesterday gave a stronger hint of a sooner-rather-than-later rate hike and the dollar strengthened and that impacts all the commodities," Citigroup strategist David Wilson said.

"As the focus is back on the dollar and its strength, the trajectory for gold is down until a hike actually happens."

"We think that the Fed will adopt a gradual pace of tightening, we expect only one rate hike this year. And policy will continue to be conditioned on data," Mizuho Bank said in a note.

Holdings of the largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, were unchanged at 21.87 million ounces for a second day on Wednesday. That level is the lowest since September 2008. [GOL/ETF]

Spot platinum was down 0.2 percent at $980.50 an ounce, within reach of a 6-1/2-year low of $942.49 hit in the previous week. Palladium was up at $619 an ounce and silver dropped 0.1 percent to $14.71 an ounce.

(Additional reporting by Manolo Serapio Jr in Manila; Editing by David Evans and Susan Thomas)