Gold set for biggest weekly drop in four despite dollar stall

By Clara Denina

LONDON (Reuters) - Gold rose on Friday as the dollar's rally stalled ahead of U.S. inflation data, but the precious metal was still on course for its biggest weekly decline in four weeks.

Spot gold rose 0.5 percent to $1,211.98 an ounce by 1001 GMT. It was down 0.8 percent for the week, however, heading for its biggest fall since the week ended April 24 and 1.5 percent below a three-month high of $1,232.20 hit on May 14.

Volumes were expected to stay thin on Friday ahead of public holidays in Britain and the United States on Monday.

"We get inflation data from the U.S. economy and comments from (U.S. Federal Reserve Chair Janet) Yellen later today, which will impact short-term price direction," Danske Bank senior analyst Jens Pedersen said.

"There is consensus among analysts that the rate hike is now being pushed back to September, but the risk is the Fed will postpone the rate hike towards the end of the year or even the beginning of 2016, which could be supportive."

The dollar fell 0.3 percent versus a basket of leading currencies after weaker than expected U.S. manufacturing data and a rise in weekly claims for state unemployment benefits.

Gold prices were getting some support from views that the Federal Reserve was now unlikely to raise U.S. interest rates at its next policy meet in June following the data.

Traders will be eyeing U.S. April consumer prices data, as well as a speech from Federal Reserve Chair Janet Yellen later in the day, for clues on the strength of the economy and the timing of the next U.S. interest rate increase.

"We still would like to see a bit more conviction for gold before we advocate taking a position," said INTL FCStone analyst Edward Meir, adding there was no clear trend on price direction.

Higher U.S. interest rates would increase the opportunity cost of holding non-yielding bullion.

Investor sentiment towards gold has turned bearish as prices have fallen from three-month highs reached earlier this week.

Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, slid to their lowest in four months on Wednesday.

Data from Thomson Reuters' Lipper service showed on Thursday that investors in U.S.-based funds pulled $597 million out of funds that specialise in commodities and precious metals in the week ended May 20, the biggest outflow since December 2013.

"Gold continues to be drawn towards the $1,200 pivot point. The metal has failed to move more than 3 percent on either side of $1,200 since mid-March," MKS Group said in a note.

Gold buying was slow this week in Asia, with the Chinese hooked on surging equities. Demand in India stayed weak and was unlikely to pick up as the wedding season cools.

Silver was up 0.7 percent at $17.24 an ounce. Platinum rose 0.3 percent to $1,155 an ounce and palladium fell 0.4 percent to $774.95 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; editing by David Clarke)