Gold rose for the third straight day to hit a new eight-week high above $942 per ounce on Thursday, buoyed by firmness in oil prices and the dollar's recent slide to its lowest level in nearly five months.

 But gains were mainly driven by funds buying U.S. gold futures, resulting in arbitrage cash gold purchases, while a rise in Asian currencies against the dollar capped the price of gold denominated in regional currencies, traders said.

 It's up mainly because of short-covering in the market,said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.  The dollar is weakening again and the oil price is up,which favours gold for a little while.

 Spot gold rose 0.5 percent to $941.90 an ounce by 0537 GMT, compared with the New York notional close of $937.10.  It earlier rose to $942.75, its highest price since March 26.

 The dollar fell to its lowest level since January 1 against a basket of major currencies on Thursday after the Federal Reserve said it had considered buying more securities, raising concerns the global financial system could be flooded with more dollars.

 Crude oil stayed above $60 a barrel after Wednesday's government data showed a steep drop in U.S. crude and gasoline inventories ahead of the summer driving season.

 U.S. gold futures for June delivery rose 0.5 percent to $942.1 per ounce from their Wednesday settlement on the COMEX division of the New York Mercantile Exchange.

 In Tokyo, yen-based gold futures posted narrower gains as the yen rose to a two-month high against the dollar. A higher yen deflates yen-based gold futures prices.

 The key Tokyo Commodity Exchange gold futures contract for April 2010 delivery rose 0.3 percent to to 2,875 yen per gram.

 Similarly, physical buying by local players was limited as they were less keen to buy due to the recent appreciation in their currencies, traders said.

 Looking ahead, data on net U.S. gold futures positions by the Commodity Futures Trading Commission on Friday may provide a clue about the sustainability of the current rally.

 Gold is moving up faster than many traders anticipated,resulting in a chain of short-covering, said a trader at a Japanese trading firm.

 We should check Friday's data to see how fast net long futures positions are being built up.

 The latest CFTC data showed net long non-commercial positions rose 7 percent in the week to May 12.

 Open interest in U.S. gold futures has risen almost 20 percent so far this year. Open interest, or the total number of futures contracts that are not closed or delivered, is a measure of liquidity and often an indicator of price direction.

 The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust , said holdings stood at 1,105.62 tonnes on Wednesday, unchanged since May 13.

(Additional reporting by Miho Yoshikawa)

© Thomson Reuters 2009 All rights reserved