Gold hovers near three-month low, dollar strength weighs

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold hovered near its lowest in three months on Tuesday after sharp overnight losses as the dollar traded at 14-month highs against a basket of major currencies, dimming the metal's appeal as a currency hedge.

Spot gold had slipped slightly to $1,254.66 an ounce by 0335 GMT. The metal closed down 1 percent on Monday, after earlier hitting $1,251.24 - its lowest since June.

"Gold appears to be testing its $1,250 an ounce support handle, and any break below may see the precious metal extend its bearish trend," said OCBC Bank analyst Barnabas Gan.

The path of least resistance for gold is to move lower as the U.S. dollar is expected to strengthen further, other traders said.

The dollar index was near July 2013 highs, boosted by a San Francisco Fed study that noted investors are pricing in a lower trajectory for interest rates rises than members of the central bank are.

It was also supported as sterling was pressured amid ongoing jitters that Scotland could vote to secede from the United Kingdom. [USD/]

A stronger greenback makes dollar-denominated gold more expensive for holders of other currencies.

"Momentum indicators highlight an accelerated pace of decline, and we maintain our expectations for further weakness toward the June low of $1,240," said analysts at ScotiaMocatta.

Top buyer China returned from a holiday on Tuesday but failed to provide any significant support to prices.

Premiums on the Shanghai Gold Exchange were steady at $4-$5 an ounce, higher than the $2-$3 seen early last week, in a sign that buying has picked up in recent days as prices drop to multi-month lows.

Investors were also eyeing geopolitical tensions over Ukraine. A ceasefire agreed between Ukraine and pro-Russian rebels last week has weakened safe-haven bids for gold, though each side accused the other of sporadic shelling.

Russia signalled on Monday it might ban Western airlines from flying over its territory as part of an "asymmetrical" response to new European Union sanctions over the Ukraine crisis.

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