Gold eases as dollar rallies on good news

London: Gold eased after rising to a one-week high yesterday as the dollar gained, but analysts said sentiment was positive and the metal may retest the $1,000-mark in the near term.

The metal, traditionally seen as a hedge against oil-led inflation, was also expected to get support from strong oil prices that jumped after an oil pipe-line explosion in Iraq.

Spot gold hit a high of $954.50 an ounce before falling to $945.90/$946.90 at 1533 GMT, down from $949.00/$949.80 in New York on Wednesday. It hit a lifetime high of $1,030.80 an ounce on March 17.

The dollar rallied after suffering steep losses in the last two sessions, rising on data showing the US economy grew in the fourth quarter in line with market expectations.

In midday New York trading, the euro was down 0.4 percent on the day at $1.5777, a bit more than one cent below last week's record highs above $1.59. But the euro was still up more than 8 percent this quarter, remaining on track for its strongest quarterly performance since late 2004. Against the yen, the dollar rose 0.7 percent to 99.680 yen. The dollar gained half a percent against the Swiss franc to 0.9937.

"On the one hand you have high oil prices supporting gold and on the other hand you have got quite a lot of news about the dollar gaining some ground against the euro and other mixed economic data that has taken some shine off gold," metals analyst Robin Bhar at UBS said.

Oil surged above $106 a barrel after saboteurs blew up one of Iraq's two main export pipelines, a Southern Oil Company official said, adding the country was likely to lose about a third of crude exported through Basra.

A rise in the dollar put pressure on the metal, which gained more than 20 per cent in 2008 on speculative buying driven by record high oil prices and expectations of further rate cuts in the United States, which reduced the dollar's appeal.

The dollar edged up against the euro but was still on track for the worst quarterly performance since late 2004 as investors compared relative economic resilience in the euro zone with a sharp US slowdown.

Demand for the US currency ahead of the end of the first quarter gave the dollar some short term support after two days of steep losses on contrasting US and euro zone data.

A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand.

"But the market is consolidating, waiting for new direction to come through, and gold would always thrive as a safe heaven and that has not gone away as a factor and it will propel gold again higher in due course," Bhar said.

Outlook positive

Analysts said investors' confidence was gradually being restored after last week's broad sell-off in commodities that knocked down gold to a one-month low of around $904 an ounce.

"We are pretty bullish on gold over the medium-term. Most likely, we are going to see some short-term stability," said Dan Smith, metals analyst at Standard Chartered Bank.

"Some people were a bit shocked by the drop we saw last week, so the market does need to recover. Obviously if we see any major breakout of the dollar, it's going to push gold up."