Gold holds above 2-1/2-week low but set for second weekly drop

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold was hovering above a 2-1/2-week low on Friday as the dollar gave back some of its recent gains, but the metal was still headed for a second straight weekly decline on the prospect of higher U.S. interest rates.

Spot gold was little changed at $1,187.90 an ounce by 0646 GMT. It fell to a 2-1/2-week low of $1,180.55 on Thursday but recovered slightly as the dollar and stocks weakened. The metal is still down 1.5 percent on the week.

The dollar edged down in early Asian trading, taking a breather from this week's rally that brought it to its highest level against the yen since 2002 on growing expectations that the U.S. Federal Reserve will raise interest rates this year.

"The (gold) market looks set to continue to trade in a $1,180-$1,195 range with a break to the downside looking more likely in line with the surging dollar," said Jason Cerisola, a trader at MKS Group.

Technical analysts at ScotiaMocatta also said gold's momentum was currently to the downside, with fresh selling expected on a break of $1,171.

The dollar has been well bid since Federal Reserve Chair Janet Yellen said last week the U.S. central bank was on track to raise rates later this year.

Economic data on Thursday suggested the same thing. Contracts to buy previously owned U.S. homes rose for a fourth straight month in April to a nine-year high, boosting the outlook for the housing market.

Traders were now waiting for U.S. GDP data later in the day.

Higher interest rates would boost the dollar and dent gold's investment appeal as it is a non-interest-paying asset.

In the near term, gold got some support from uncertainties around the Greek debt crisis.

Greece and its European and International Monetary Fund lenders have been locked in slow-moving talks on a reform agreement for four months with no breakthrough in sight. Without a deal, Athens risks default or bankruptcy in weeks.

A worsening of the Greek debt crisis might trigger demand for gold coins and bars. Gold is usually seen as a hedge against political and financial risk, although the impact on demand from wider political worries is usually short-lived.

(Reporting by A. Ananthalakshmi; Editing by Alan Raybould and Joseph Radford)