Gold near 2-1/2 week high on U.S. rate expectations

By Jan Harvey

LONDON (Reuters) - Gold held near 2-1/2 week highs on Wednesday as upbeat euro zone economic data supported the euro versus the dollar, and as expectations receded that a U.S. interest rate rise is imminent.

The metal's five-day rally to Tuesday, its longest since January last year, came after Federal Reserve chair Janet Yellen sounded a cautious note last week on the U.S. economy and the pace of any rate hike.

Spot gold was at $1,192.40 an ounce at 1024 GMT, little changed from Tuesday, while U.S. gold futures for April delivery were up 80 cents an ounce at $1,192.20.

"Yellen last week made it clear that the Fed will probably take more time before we see further interest rate hikes. That was clearly supportive for gold, so we weren't surprised to see prices rising again," Commerzbank analyst Daniel Briesemann said.

Gold hit its highest since March 6 on Tuesday at $1,195.30 an ounce, before paring gains after U.S. data showed an uptick in underlying inflation pressures and gains in home prices.

"Yesterday's CPI data from the U.S.... led to renewed expectations for timely rate hikes, which put the brakes on (gold's) increase," Briesemann said. "We have different data which are keeping each other in balance. Unless we get a clearer picture on what's going on, gold prices may not move that much."

Since the Fed met last week, expectations for a U.S. rate rise have shifted, with most of Wall Street's top banks now expecting the Fed to hold off until at least September, compared with previous expectations of June, a Reuters poll showed.

Gold prices had been hurt by expectations for a near-term rate hike, which would lift the opportunity cost of holding non-yielding bullion while boosting the dollar.

The U.S. unit fell against the euro on Wednesday, further underpinning gold, as the single currency benefited from a robust German business morale survey that added to expectations that an economic recovery in the euro zone is strengthening. [FRX/]

However, physical gold demand in Asia, which supported the market when prices were around $1,145-55, is looking sparse at current levels and is not providing the cushion seen previously, precious metals house MKS said in a note on Wednesday.

"Further, it feels that this demand is not likely to re-emerge in any meaningful quantities until prices get back around $1170-75," it added.

Among other precious metals, silver was up 0.4 percent at $16.95 an ounce, while spot platinum was up 0.5 percent at $1,142.20 an ounce and spot palladium was up 0.6 percent at $765.97 an ounce.

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