Gold fell in Europe on Friday, with sentiment deflated after Washington's pledge for a tighter budget eased worries about ballooning US deficits and boosted the dollar, dealers said. Spot gold fell to $421.70/422.20 an ounce by 1552 GMT from $424.35/425.10 in late New York trade on Thursday. Bullion was fixed on Friday afternoon at 422.50.
"There's been relatively slow trading activity although the market is slightly better bid now than earlier when the dollar had threatened to push through $1.30 against the euro," David Holmes, vice-president at RBC Capital markets, said.
He added, however, that lower prices would probably be viewed as an entry level for investors as stale long positions had already been shaken out.
Trade was expected to be thin in New York ahead of a long weekend for the Martin Luther King holiday on Monday.
The dollar surged after a senior Federal Reserve official hinted the United States could accelerate the pace of raising interest rates and Washington pledged a tighter budget and strong dollar policy.
Gains were later extended slightly by dollar-positive producer prices and industrial output figures. The euro was last at $1.3102.
St. Louis Federal Reserve President William Poole said the central bank would not hesitate to depart from its pace of measured interest rate increases if necessary.
Higher interest rates tend to boost demand for dollar deposits and dent that of dollar-priced gold for non-US investors.
However, analysts were still pointing to higher gold prices further out as they expected the fiscal, current account and trade deficits to continue adding downward pressure to the dollar.
"We continue to view the recent sell-off in gold as a temporary phenomenon and that once the correction in the dollar is done, gold will rally," John Reade of UBS Investment Bank said in a daily report.
Consultancy GFMS said on Thursday it expected gold to average $447 in the first half of this year, with the market recovering from a wobbly start as the dollar's overall downtrend resumed.
Silver followed gold lower to $6.61/6.64 from $6.71/6.74
Platinum dipped to $852.00/857.00 from $857.50/862.50, while palladium eased to $182.00/187.00 from $185.00/191.00.