Gold fell around 1 percent on Friday, after the dollar surged against the euro and fears about an imminent credit downgrade of euro zone countries prompted bullion investors to take profits on the recent rally.

The metal fell along with U.S. equities and other riskier assets on speculation that Standard & Poor's would downgrade the credit ratings of several euro zone countries. S&P was set to cut ratings of France and Austria by one notch each, the Financial Times reported.

The euro sank to a 16-month low at under $1.27.

The dollar seems to be the main go-to safe-haven play at the moment. Market talk of downgrade has taken away some of the recent support from gold, said David Meger, director of metals trading at futures brokerage Vision Financial Markets.

Given the size of its recent rally, it's certainly not surprising to see profit taking on the back news like this, Meger said.

Gold remained up about 5 percent for the year, thanks to buying by investors re-entering the market after a 10 percent drop in December. Recently the metal's positive correlation with the euro had shown signs of strain. In the previous two months, gold had traded in lockstep with the shared currency.

Spot gold was down 0.9 percent at $1,634.56 an ounce by 11:22 a.m. EST (1622 GMT).

U.S. gold futures for February delivery were down $12.40 an ounce at $1,635.30.

Worries over European sovereign debt helped drive bullion prices to record highs last year even as the dollar strengthened, but in the fourth quarter gold traded more in line with other commodities and against the U.S. currency.

Sovereign issues in the euro zone are clearly not over and we may see further bouts of price correction in the gold market over the coming months, said Anne-Laure Tremblay, analyst at BNP Paribas.

LUNAR NEW YEAR LOOMS

Buying sentiment worsened after the Shanghai Gold Exchange said it will temporarily raise margins and daily trading limits for its gold and silver forward contracts on January 20 ahead of the week-long Lunar New Year holiday.

Analysts said gold has gotten a boost from physical buying from China, the world's largest bullion consumer. But buying in China should ease as New Year celebrations get underway.

Silver was down 1.6 percent at $29.79 an ounce. Spot platinum was down 0.7 percent at $1,480.74 an ounce, while spot palladium was down 1 percent at $629.70 an ounce.

Platinum is on track for its best weekly performance since October, however, for a 5 percent gain. The metal was boosted by concerns over South African power supply, which state power utility Eskom said could be under pressure this year.