* Dollar index recovers from previous day's five-week low
* Silver hits three-week high after rallying 4 pct on
Wednesday
* GRAPHIC-2016 asset returns: http://reut.rs/1WAiOSC
(Updates prices, adds comment)
By Jan Harvey
LONDON, June 9 (Reuters) - Gold eased from three-week highs
on Thursday as a recovery in the dollar prompted some buyers to
cash in gains after the previous day's sharp rally, though the
outlook for U.S. interest rates offered support.
The metal surged 1.5 percent on Wednesday after
below-consensus U.S. payrolls data and dovish comments from
Janet Yellen, chair of the U.S. Federal Reserve, dampened
expectations of an imminent rate hike.
Gold is highly sensitive to rising interest rates, which
lift the opportunity cost of holding non-yielding bullion while
boosting the dollar, in which it is priced.
Spot gold XAU= reached its highest since May 18 in early
trade, at $1,266.01 an ounce, before easing to $1,259.72 by 1319
GMT, down 0.2 percent. U.S. gold futures GCv1 for June
delivery were down 70 cents at $1,263.
"Gold is a bit lower as the dollar is doing (better),
especially versus the euro," ABN Amro analyst Georgette Boele
said. "We need to get the FOMC meeting behind us. I think
afterwards markets will further price out the Fed, meaning gold
and precious metals will go higher."
The dollar, which on Wednesday slipped to a five-week low
against a basket of currencies, regained some lost ground on
Thursday, pressuring gold.
A grim mood on global financial markets sent investors
searching for the security of the dollar and yen, driving both
higher against a euro weakened by the prospect of prolonged low
inflation and negative interest rates. FRX/
Investors have almost priced out the chance of a rate
increase at the Fed Reserve's June 14-15 policy review and
reduced the likelihood of a July increase to about 26 percent.
Yet markets remain cautious on Fed policy, analysts said.
"While there is likely further room to the upside for gold,
there may be some road blocks to the rally near term," HSBC said
in a note. "We expect that as the FOMC (Fed policy meeting)
approaches, trading volume may quieten down and some near-term
traders will book square and take profits."
"There is always the possibility the Fed surprises the
market and raises rates, which could rapidly reverse gains."
Among other precious metals, silver XAG= hit a three-week
high at $17.22 an ounce after climbing nearly 4 percent in the
previous session, its biggest one-day gain since April 19.
The metal was later down 0.1 percent at $17.01. Platinum
XPT= was 1.5 percent lower at $995.40, while palladium XPD=
dropped 0.9 percent to $552.72.
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GRAPHIC-2016 asset returns: http://reut.rs/1WAiOSC
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