By A. Ananthalakshmi
SINGAPORE (Reuters) - Gold fell on Friday, retreating from a 3-1/2-month high after strong U.S. inflation data supported the dollar, but the metal was set to post its biggest weekly jump in four weeks on bets the Federal Reserve will not hike interest rates this year.
Spot gold eased 0.4 percent to $1,177.80 an ounce by 0637 GMT. It had hit a 3-1/2-month high of $1,190.63 in the previous session, but ended the day lower after U.S. inflation and jobless claims data calmed some concerns about the strength of the U.S. economy and boosted the dollar.
Traders cautioned gold could give back some of its sharp gains as it nears the key $1,200-an-ounce level.
"Gold is thrown a lifeline as investors eye a delay to U.S. rate hike," HSBC said. Gold may tread higher but "faces stiff resistance at the psychological $1,200 level," it added.
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Bullion was also losing some support from the physical markets, where consumer buying interest dropped due to the recent price rally.
Prices on the Shanghai Gold Exchange, an indication of demand in top consumer China, were at a discount of 50 cents to a $1 an ounce on Friday. They were at a premium of $2-$3 earlier in the week.
Some modest selling from China was evident early in the day, MKS Group trader Sam Laughlin said, adding that gold should see support at the $1,180 level.
Despite the losses on Thursday and Friday, gold was on track for a 2-percent weekly jump as markets believe other disappointing U.S. data in the backdrop of sluggish economic indicators out of China would prompt the Fed to stand pat on rates until next year.
Bullion benefits from low interest rates that cut the opportunity cost of holding non-yielding assets.
Investor sentiment towards bullion has improved. Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.73 percent to 700 tonnes on Thursday, their highest since mid-July.
Many Fed watchers are exasperated by the mixed messages from the U.S. central bank in recent weeks. Fed Chair Janet Yellen and other officials have said they expect a rate hike will be needed by the end of this year, but two Fed governors this week urged caution.
Among other precious metals, silver was headed for a third straight weekly gain, while platinum was eyeing its second weekly jump. Palladium, however, snapped a five-week winning streak, and was headed for a 1-percent drop.
(Reporting by A. Ananthalakshmi; Editing by Michael Perry and Sunil Nair)
