(REUTERS) -- Gold prices slid below $1,680 an ounce on Wednesday, extending the previous day's retreat from two-week highs as the momentum sparked by expectations for further monetary easing faded after the metal failed to break through key resistance.

Traders cashed in gains in the yellow metal after it stalled beneath the $1,700 an ounce level on Tuesday, with selling accelerating late in the day after a COMEX options expiry. Traders are now awaiting fresh U.S. data for direction.

Spot gold was down 0.2 percent at $1,676.80 an ounce at 1134 GMT. It is still on track for its best weekly performance since late February, however, after the Federal Reserve suggested a continuation of easy monetary policy will be necessary to support growth and bring down unemployment.

The Fed comments have given much-needed stimulus to an otherwise lackluster, rangebound gold market, Richcomm Global Services analyst Pradeep Unni said. Resistance at 1,694-1,700 is formidable, but in the coming sessions, we (could) see that being scythed very convincingly.

Dollar weakness is likely to be the catalyst for such a move, he said.

The dollar recovered early losses against a basket of other currencies but remained under pressure from the Fed's commitment to low interest rates. Dollar weakness makes assets priced in the U.S. unit cheaper for other currency holders.

The U.S. currency's softer tone failed to benefit most commodities, as oil prices came under pressure from talk of a release of strategic oil reserves by the United States, and industrial metals eased.

Activity on the wider markets suggested appetite for assets seen as higher risk was muted. European stocks surrendered early gains and safe-haven German bund futures firmed. 

U.S. gold futures for April delivery were down $7.90 an ounce at $1,677.00.

PRICES STRUGGLE

Physical gold demand has come under pressure this week from an ongoing strike among jewelers in India, the world's largest bullion consumer, who are protesting against a hike in import duty for bullion.

India's Finance Minister said on Tuesday the country won't cut import duty on gold, which it doubled to 4 percent this month, although it is considering jewelljewelers'ers' demands for the removal of a 0.3 percent excise duty on unbranded jewellery.

The removal of the excise tax may be a step towards meeting some of the grievances listed by Indian jewelers in the wake of the government budget, said HSBC in a note.

Until the Indian jewelers reopen their shops, Indian gold demand will remain weak. The dip in Indian demand may be partly offset by better Chinese physical demand as Shanghai premiums remain high.

Gold prices are up 7.5 percent this year, but have struggled to make new headway after failing to break through the $1,800 an ounce level earlier this month. They remain well off the record high of $1,920.30 an ounce they hit in 2011.

Goldman Sachs said in a report on Wednesday that, as gold prices are closely linked to U.S. real interest rates, they may have been suffering from expectations for stronger growth.

The gold market may have been expecting that real rates would soon be rising along with improving economic growth, leading to a sharp decline in net speculative length in gold futures, it said.

As we look forward, our U.S. economists forecast subdued growth and further easing by the Fed in 2012, which should push the market's expectations of real rates back down near zero basis points and gold prices back to our six-month forecast of $1,840 an ounce, it added.

Among other precious metals, silver was flat at $32.50 an ounce, spot platinum was down 0.8 percent at $1,634.20 an ounce, and spot palladium was down 0.5 percent at $649.20 an ounce.