Gold falls nearly three percent in London

Gold fell nearly 3 percent in Europe on Monday as the dollar firmed against the euro and as oil prices slipped temporarily, triggering a bout of selling. However, a resurgence in physical demand after gold dipped below $880 an ounce put a floor in prices.
At 1403 GMT gold was trading at $881.80/882.80 an ounce, against $901.35/902.75 late in New York on Friday. Earlier it touched a low of $877.00. Silver also fell in gold's wake, sliding almost 5 percent to a session low of $16.56 an ounce. It later recovered to trade at $16.73/16.78 against $17.36/17.43. "The most obvious driver of the day is that the euro has collapsed," said J.P. Morgan analyst Michael Jansen.
The dollar rallied on expectations the US Federal Reserve will take a more hawkish line on interest rates later this week at a meeting in which it is widely expected to leave rates unchanged at 2 percent. Meanwhile the euro fell sharply against the US currency after soft European economic data earlier on Monday, which showed a contraction in manufacturing and services activity in the eurozone.
A stronger dollar typically weighs on gold, as it is bought as a hedge against weakness in the US currency. A stronger greenback also makes dollar-priced gold more expensive for holders of other currencies. However, traders said interest in gold from physical buyers, who have been discouraged by high and volatile prices in recent months, has supported the market.
"We ran into some good physical interest in the high $870s," said Simon Weeks, director of precious metals at the Bank of Nova Scotia. "That has stopped the rot." The market is now turning its attention to the US Federal Open Market Committee's two-day rate-setting meeting, which starts on Tuesday. The FOMC is widely expected to leave rates on hold at 2 percent, but is seen sharpening its rhetoric on inflation in its accompanying statement.
Both its decision and its post-decision statement could have a significant impact on the dollar, and therefore on gold. Any suggestion that a rate hike may be forthcoming later this year could help the currency. Among other precious metals, spot platinum slipped to $2,033.50/2,053.50 an ounce from $2,048.50/2,068.50 late in New York. Palladium edged down to $466.50/474.50 an ounce from $469.50/477.50 an ounce.