Gold prices retreat as dollar extends gains

By Jan Harvey

LONDON (Reuters) - Gold eased on Thursday as the dollar extended its biggest one-day rally in over a month, though losses were limited by uncertainty over the outlook for U.S. monetary policy this year.

The precious metal has eroded all its early gains for the week after touching a three-week high at $1,262.60 an ounce on Tuesday, under pressure from a rebound in the U.S. currency.

Spot gold was down 0.3 percent at $1,239.90 an ounce at 1134 GMT, having touched a low of $1,228.70. U.S. gold futures for June delivery were down $6.90 an ounce at $1,241.40.

Gold has steadied after its biggest quarterly rise in nearly 30 years, driven by a retreat in expectations that the Federal Reserve will push ahead with rate hikes this year.

That would lift the opportunity cost of holding non-yielding assets, while boosting the dollar, in which gold is priced.

"The big shock for the gold market, and commodities markets in general, was the big move higher in the dollar yesterday," Danske Bank analyst Jens Pedersen said. "Overall I see gold prices remaining fairly stable around current levels."

"What risks the gains in the gold market this year reversing is the Fed starting to push ahead with rate hikes, but I don't see them hiking before September," he said. "If the recent slide in the dollar is sustained, gold will keep these gains."

The dollar rose another 0.2 percent versus a currency basket as improved risk sentiment led investors to trim positions in low-yielding currencies like the yen and the euro.

Global stocks rose to their highest in more than four months on Thursday, while European stocks and oil prices pared early losses to turn higher.

Bullion-backed exchange-traded funds have seen outflows of late following sharp inflows earlier in the year. Holdings of the world's largest gold-backed ETF, SPDR Gold Shares, fell 5.05 tonnes on Wednesday to their lowest in a month.

"Gold is weakening on a recovery in investor risk appetite. The sharp (equities) rally and the levelling off of gold-ETF demand recently argue for some period of price consolidation," HSBC said in a note.

"It is possible this consolidation turns into liquidation, but we think any continued sell-off, though likely, should be modest."

Among other precious metals, silver was down 0.5 percent at $16.11 an ounce, after reaching its highest since late October the previous day. Platinum was down 0.8 percent at $986.65 an ounce, while palladium was down 0.1 percent at $542.23 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; editing by Jon Boyle and Jason Neely)