Gold heads for biggest weekly drop in eight on Fed rate views

BENGALURU (Reuters) - Gold steadied after two days of losses on Friday, but was on track for its biggest weekly slide in eight weeks on the back of a firmer dollar and indications from the U.S. Federal Reserve that it could raise interest raise rates as early as June.

FUNDAMENTALS

* Spot gold had risen 0.2 percent to $1,256.60 per ounce by 0047 GMT, after declining for two days in a row. The metal hit a three-week low of $1,244 in the previous session.

* The safe-haven asset has shed 1.4 percent for the week, its biggest such drop since the week ended March 25.

* U.S. gold futures were up 0.2 percent to $1,257.40 early on Friday but headed for a 1.2-percent weekly drop.

* The U.S. economy could be strong enough to warrant an interest rate increase in June or July, New York Federal Reserve President William Dudley said on Thursday, cementing Wall Street's view that the Fed will tighten policy soon.

* Earlier in the week, minutes of the Fed's April meeting revealed that most policymakers felt a rate increase might be appropriate as early as next month.

* Gold is highly sensitive to rising interest rates, which increase the opportunity cost of holding it. It has rallied nearly 20 percent this year on expectations that the Fed has slowed the pace of rate hikes due to global uncertainty.

* The dollar held at its highest in more than seven weeks against a basket of major currencies early on Friday, on track for a third week of gains as investors position themselves for an early rate hike.

* Upbeat U.S. economic data on Thursday supported views of a rate hike next month. The number of Americans filing for unemployment aid fell from a 14-month high last week.

* Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank would not hesitate easing monetary policy further if market moves, including a spike in the yen, threatened prospects for achieving its 2 percent inflation target.

* Holding in SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, rose 0.52 percent to 860.34 tonnes on Thursday. [GOL/ETF]

(Reporting by Vijaykumar Vedala in Bengaluru; Editing by Joseph Radford)