Gold retains losses as Fed says soft US economy only transitory

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold retained losses from overnight on Thursday, as the Federal Reserve characterised a recent slowdown in the U.S. economy as transitory, not ruling out an interest rate hike this year.

Spot gold was trading flat at $1,204.20 an ounce by 0640 GMT, after losing 0.6 percent on Wednesday. The metal had hit a three-week high in the run up to the Fed statement on expectations recent soft economic data would prompt the U.S. central bank to delay any rate hike.

The Fed downgraded its view of the U.S. labour market and economy after its two-day policy meet and said the poor performance was in part due to transitory factors.

But the Fed's guidance differed little from its last meeting, and the central bank did not effectively rule out hiking rates at its next meeting.

"The FOMC statement may have been interpreted as slightly hawkish by the gold markets," said HSBC analyst James Steel, referring to the Fed's policy-setting Federal Open Market Committee.

Investors believe higher rates could dent demand for bullion, a non-interest-paying asset.

Bullion traders now believe gold could see further downside as it has failed to hold on to the three-week high.

"(The $1,215 level) is forming considerable resistance and should have been tested overnight with the plummeting greenback, but sizable offers at this level continue to cap the market," said MKS Group trader Jason Cerisola.

The dollar fell to a nine-week low on Wednesday after data showed the U.S. economy grew 0.2 percent in the first quarter, down sharply from the fourth quarter's 2.2 percent and below market expectations for 1.0 percent growth.

Though the dollar trimmed losses after the Fed statement, traders said gold should have gotten a boost given the sharp losses in the greenback and its failure to do so hints at more declines for the yellow metal.

Traders would now be watching more U.S. data to gauge how it would affect the Fed's timing regarding rates.

Also in focus was the Greek debt crisis, which could boost safe-haven demand for gold.

Euro zone officials sought to wring policy concessions from Greece on Wednesday to unlock urgently needed aid after Athens said it would present a list of reforms for legislation.

Failure to strike a deal would result in Greece defaulting on payments and exiting the euro zone.

Physical bullion demand in Asia has quietened in recent days as gold held above $1,200 an ounce. A significant pick-up in demand would support global prices.

(Reporting by A. Ananthalakshmi; Editing by Ed Davies, Richard Pullin and Subhranshu Sahu)