Gold fell as much as 1.2 percent early on Friday as the dollar rose and markets digested the mixed implications of a European Central Bank plan to pump out about 1 trillion euros to reflate the euro zone's flagging economy. The metal, often seen as a hedge against inflation, jumped more than 1 percent above $1,300 an ounce on Thursday after the ECB announcement.
But with the euro hitting an 11-year low against the dollar, gold prices have since pared some of those gains as investors focused on the impact of the stronger US currency, which makes dollar-denominated assets more expensive for foreign investors. "Gold was completely dislocated from the dollar yesterday, meaning that euro-gold is the best performing commodity this year, helping dollar gold stay fairly stable around $1,300," Saxo Bank's Ole Hansen said.
"But that strength in the dollar is now proving too much." Spot gold dropped to a session low of $1,284.26 an ounce and was down 0.9 percent at $1,289.40 by 1536 GMT. Bullion peaked at $1,306.20 on Thursday, its highest since August 15, and it was still headed for a third straight weekly gain. US gold futures were down $11.40 at $1,289.20 an ounce. The dollar rose by up to 1.1 percent against a basket of currencies, mostly due to euro weakness, while European shares had their biggest two-week rally in five years.
Euro-priced gold hit its highest since April 2013 at 1,167.60 euros an ounce. Spot gold has risen by about 9 percent since the beginning of the year as political uncertainties in the euro zone and worries about global economic growth lifted investment demand. Traders are now likely to turn to Sunday's election in Greece and next week's Federal Open Market Committee (FOMC) policy meeting for clues on the wider economic environment and when US interest rates might rise. Among other precious metals, spot silver was down 0.8 percent at $18.16 an ounce. Palladium lost 1 percent to $763.98 an ounce, while platinum fell 0.5 percent to $1,271.50 an ounce.
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