Gold falls after seven-day rally; set for second weekly gain

By Clara Denina

LONDON (Reuters) - Gold fell on Friday, snapping a seven-day rally as the dollar rebounded after Federal Reserve officials signalled they remained on track to raise rates this year, but the metal still looked set to post its second straight weekly gain.

At separate events on Thursday, the presidents of the St. Louis Fed and Atlanta Fed said an adjustment away from ultra-loose monetary policy might be needed in light of the U.S. economy's improvement since the 2007-2009 financial crisis.

"U.S. growth and the outlook for interest rates ... for us are the main drivers and we'll see further incremental declines in the gold price," Julius Baer's head of commodity research Norbert Ruecker said.

Spot gold eased 0.3 percent to $1,20.80 an ounce by 1251 GMT. The metal jumped 2 percent on Thursday to its highest since March 2 at $1,219.40 in reaction to tensions in the Middle East.

U.S. gold futures for April delivery fell $4.90 to $1,199.80 an ounce.

Saudi Arabia and its allies launched air strikes in Yemen on Wednesday, rattling wider markets and supporting gold, usually seen as an insurance against risk.

"Geopolitics has never been something that could set a trend in gold prices, it only causes a short-term deviation from the existing trend," Ruecker said.

The dollar rose 0.2 percent versus a basket of currencies, supported by strong U.S. jobs and service sector data, while European stocks gained after a two-day retreat.

Despite Friday's losses, gold was on track to finish the week up around 1.5 percent after its seven-day rally, the metal's longest winning stretch since August 2012.

Gold had gained strength after the Fed sounded cautious at its policy meeting last week about the pace of an interest rate increase, prompting the dollar to fall from multi-year highs.

An aggressive rate-rise path could hurt demand for gold, a non-interest-paying asset.

Investor caution over the price rally was evident as SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, continued to post outflows. Holdings fell nearly 6 tonnes on Thursday to 737.24 tonnes, the lowest level since January.

Physical demand across Asia slowed this week as the long rally in prices discouraged buyers.

Platinum was down 0.8 percent at $1,143.74 an ounce, while silver rose 0.2 percent to $17.10 an ounce and palladium lost 3 percent to a two-month low of $749.47 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Janet Lawrence)