Gold sets new three-month high as investors shun risky assets

By Susan Fenton

LONDON (Reuters) - Gold hit three-month highs on Wednesday as the dollar slid versus the euro and European shares fell sharply, prompting investors to seek shelter in assets perceived as safer.

Data showing the U.S. economy's services sector expanded in January at a slower pace than expected overshadowed stronger-than-expected U.S. ADP private payrolls data, helping knock the dollar to a 14-week low against the euro.

Spot gold was up 0.9 percent at $1,138.46 at 1618 GMT, having earlier touched its strongest since Nov. 2 at $1,139.90.

Gold, an asset that thrives on uncertainty, has gained more than 6 percent since the start of 2016 on concerns over the growth outlook, especially in China, after losing 10.4 percent in 2015.

U.S. gold for April delivery was up 1.1 percent at $1,139.10 an ounce.

"I think the main driver we are seeing is the weaker dollar, based on continuing uncertainty about the global economy," said Robin Bhar, an analyst at Societe Generale.

The dollar hit its lowest against the euro since last October and wiped out recent gains against the Japanese yen after soft U.S. services sector data and comments from the Federal Reserve's William Dudley prompted the market to scale back expectations for interest rate rises.

Dudley told MNSI that financial conditions have tightened considerably since the Fed raised interest rates in December, and if that persists policymakers would have to take that into consideration when they meet in March.

The near-term outlook for gold will be largely influenced by the pace of U.S. interest rate rises. Higher rates would make gold less attractive as it would increase the opportunity cost of holding non-yielding assets.

Non-farm payrolls data due out on Friday should give a clearer picture of the U.S. labour market, although strong data would not necessarily make the Federal Reserve more likely to raise interest rates next month.

"I would say it is not really about how strong the U.S. labour market is but about how a slowdown elsewhere could influence the U.S. Federal Reserve," said Simona Gambarini, an analyst at Capital Economics.

Buying by China, the world's top gold consumer, ahead of next week's Lunar New Year holiday, is underpinning gold, analysts said.

Spot silver was up 2.5 percent at $14.65 an ounce, while palladium was up 3.1 percent at $503.89. Platinum was up 3.3 percent to $878.11.

(Additional reporting by Manolo Serapio Jr. in Manila and Clara Denina in London; Editing by Jan Harvey)