(REUTERS) -- Gold prices slipped below $1,670 an ounce on Friday, pausing in their biggest one-week rally since late February as the dollar firmed against key currencies, with the euro falling out of favour due to worries over Spain's financial health.
Nominally higher risk assets, like stocks and commodities, also came under pressure after Chinese growth data released overnight failed to meet expectations.
Spot gold was down 0.4 percent at $1,668.66 an ounce at 1453 GMT, while U.S. gold futures for June delivery fell $10.20 an ounce to $1,670.40.
The metal is still on track to rise 2.4 percent this week after a soft U.S. jobs report last Friday stoked expectations for new quantitative easing measures. Ultra-loose U.S. monetary policy was a key driver of record gold prices last year.
However, a rebound in the dollar on Friday took the wind out of the precious metal's sails.
Especially in the United States, the investment climate is very neutral towards gold at this stage. People really need to see a policy catalyst before they come back aggressively, Standard Bank analyst Walter de Wet said.
On the physical side, from the end of this month there is really no seasonal demand coming until August, he added. It is going to be difficult to break much higher if we don't have this physical buying supporting any investment demand coming through for the next two or three months.
The dollar was up 0.4 percent against the euro as Spanish bond yields rose on data showing the country's banks were relying heavily on ECB lending, and after Chinese growth data disappointed traders.
The single currency hit a session low after a report showed U.S. consumer sentiment slipped in early April.
A report released on Friday showed China's economy grew at its weakest pace in nearly three years in the first quarter, with annual rate of expansion easing to 8.1 percent from 8.9 percent in the previous three months.
European shares were on track for a fourth straight week of losses as renewed concerns about the rising cost of borrowing in some highly indebted euro zone countries dampening sentiment, while safe-have German bund futures rose.
Gold is expected to remain closely tied to the dollar on Friday. A stronger dollar tends to weigh on gold, as it makes dollar-priced commodities more expensive for other currency holders, and curbs the metal's appeal as an alternative asset.
STRUGGLE FOR MOMENTUM
Gold is on track to rise nearly 7 percent this year but has struggled to gain momentum after a strong showing in January as expectations for a further round on monetary easing fluctuate.
A Reuters poll released Friday showed analysts are turning more cautious towards gold, with heady forecasts of $2,000 an ounce receding fast as the economy stabilises.
While the precious metal remains on course to rally through this year and into 2013, just one analyst of 33 polled expected it to average more than $2,000 an ounce this year, against five analyst of 45 in a similar poll in January.
The last six months has seen an increase in correlation between gold and other risk assets, Schroders Private Banking head of asset allocation Robert Farago said on Friday. While this is not readily explainable and therefore may be somewhat coincidental, it does reduce the metal's attraction as a portfolio diversifier.
I am not convinced that a deflationary environment will prove favourable in the short term, he added. This would produce a liquidity squeeze and gold may well prove a source of funds since almost all investors are sitting on profits.
Physical buying in Asia's bullion market slowed to a trickle on Friday, as higher prices pushed traders to the sidelines, but a gold-buying festival in India in late April is likely to help bring in some demand from the world's top consumer of the metal.
Silver was down 0.9 percent at $32.02 an ounce, spot platinum was down 0.5 percent at $1,590.75 an ounce and spot palladium was down 0.2 percent at $647.75 an ounce.
CME Group, the biggest operator of U.S. futures exchanges, said it will cut margins for COMEX silver futures for the second time since February in an attempt to boost liquidity after a narrow price range tempered trading interest.