Gold prices rose to a record high at $1,264.90 an ounce in Europe on Monday as a slip in the dollar added impetus to the metal's existing rally on the back of rising concerns over financial and sovereign risk.

The metal later eased back below $1,260 an ounce, however, as news that China was to lift the yuan's peg to the dollar to allow greater flexibility in its exchange rate, which hurt the U.S. currency, lifted interest in assets seen as higher risk.

Spot gold was bid at $1,258.15 an ounce at 6:30 a.m. ET, against $1,255.35 late in New York on Friday. U.S. gold futures for August delivery rose $1.30 an ounce to $1,259.60.

Gold prices have risen more than 15 percent this year as rising concerns over sovereign debt levels in Europe and the prospect of further financial market instability boosted interest in the precious metal as a haven from risk.

Its long-running inverse relationship with the dollar weakened as risk aversion fueled buying of both assets, but a slide in the U.S. currency on Monday is now adding further impetus to its run higher, analysts said.

It might be that there may be an asymmetry now -- dollar strength can help gold, and dollar weakness can help gold as well, said Michael Lewis, head of commodities research at Deutsche Bank.

Central banks globally do have quite high dollar reserves and the idea that they may now in aggregate be buying gold is an interesting signal of the message that sends on their U.S. dollar holdings, that they are probably overweight.

Gold priced in currencies other than the dollar remained below recent record highs on Monday.

The euro hit its highest levels in about a month versus the dollar on Monday after a pledge from China that it would allow greater flexibility in its currency.

Asian currencies and stocks rose and U.S. Treasuries fell on expectations that China's promise to give the currency new room to move would ease political tensions with the West and encourage investors to snap up riskier assets.

The dollar was sold off across the board as market players reacted to the likelihood of the USD playing a less important role in China's exchange rate mechanism, said Credit Agricole in a note.


European shares rose for the ninth session to a five-and-a half week high after China's move boosted confidence in the global economy. .EU

Other commodities were also sharply higher, with copper and zinc prices rising more than 3 percent and oil up more than $1 a barrel to above $78. Analysts are betting that Chinese imports of key commodities may rise.

Strength in industrial metals lifted silver, platinum and palladium. Silver was bid at $19.32 an ounce against $19.10, having earlier hit its highest since May 17 at $19.53.

Platinum was at $1,596 an ounce against $1,585.50, having earlier hit its highest since May 20 at $1,606.50 while palladium was at $496.10 against $487.50. Earlier the autocatalyst metal hit a four-week high at $499.

Speculators in New York platinum and palladium futures lifted their net long positions in the metals last week, with open interest in NYMEX palladium futures staging its largest weekly rise since late March.

Both metals may be supported by increased flexibility in the yuan exchange rate, said UBS analyst Edel Tully in a note.

Platinum and palladium... stand to benefit from becoming cheaper in local terms, she said. China is an important consumer of palladium in particular for auto production, so yuan appreciation should boost (platinum group metals) demand.

(Reporting by Jan Harvey; Editing by Alison Birrane)