(REUTERS) -- Gold rose Thursday, led by a climb in the euro on the back of growing confidence in Greece's ability to complete a bond swap to avoid defaulting on its debt, and by evidence that this week's decline to six-week lows had lifted investor demand.

The euro edged up as major banks and pension funds threw their weight behind Greece's bond swap offer to private creditors, thereby giving gold a boost.

A group of 30 banks and funds representing 40.8 percent of Greece's 206 billion euros of outstanding debt said they would take part in the deal, joining other Greek and foreign banks and pension funds which have already pledged to accept the offer.

Gold usually trades in tandem with the euro, and inversely to the dollar. This correlation has strengthened this week to reach its most positive in over two years, meaning the influence of fluctuations in the single European currency is greater on the bullion price than at any time since January 2010.

Spot gold was quoted up 0.7 percent on the day at $1,696.66 an ounce by 1324 GMT, having recovered by 2.3 percent since striking a 1-1/2-month low earlier this week, while gold priced in euros was flat at 1,281.06 euros an ounce.

Strong U.S. private employment data on Wednesday fuelled expectations for a robust reading on the broader jobs market with Friday's monthly non-farm payrolls report, which could hamper gold's advance.

Gold has lost some direction, Mitsubishi analyst Matthew Turner said. The price, at $1,700 is high historically and gains are going to be difficult to come by, unless there is some big event, we won't drift higher to $2,000,.

We are drifting a bit. (Quantitative easing) would be the one thing that would get the market back. So U.S. economic data is more important than ever and Friday's (number) will be a big one. But it doesn't seem likely that it will be much worse than expectations. In fact, it could exceed them.

Gold has risen nearly 9 percent so far this year, having rallied for 11 years in a row, supported in large part by central banks around the world injecting trillions of dollars of liquidity into the markets to lower interest rates and avoid a steep slowdown in the global economy, after the financial crisis of 2008 and the two-year old euro zone crisis.

Quantitative easing, which keeps interest rates low via central bank purchases of government bonds, has been one of the most gold-supportive policy tools put to use, because of its dampening effect particularly on the U.S dollar.

NO QE BOOST?

A Wall Street Journal report that the Federal Reserve may consider sterilising its bond purchases to avoid aggravating inflationary pressures by further expanding its balance sheet, provided a marginal negative note for gold.

Citing people familiar with the matter, the newspaper reported on Wednesday that should the Fed decide to buy more bonds to boost growth, it could borrow back the money it used to buy those bonds for short periods of time at low interest rates. Doing so would take that money out of circulation, or sterilise it.

One way a central bank can sterilise bond purchases is by lending out the same amount it has bought, thereby limiting growth in money supply, which can fuel inflation. The European Central Bank, for example, offers to lend any excess acquired through bond purchases through seven-day term deposits to drain off extra liquidity.

The 'sterilised QE' possibility would likely require a different reaction function for gold than what market participants have been used to in the past two instances of easing, as sterilisation would mean there is no actual balance sheet expansion - thereby removing the debasing element and suggesting that the dollar would not weaken as it did in the past, Edel Tully, a strategist at UBS, said in a note.

The ECB kept euro zone rates unchanged at a policy meeting.

The central bank, which last week injected an extra half-trillion euros into the financial system in the form of cheap three-year loans to commercial banks, is expected to keep euro zone rates unchanged and signal that it has played its part in fighting the debt crisis.

Holdings of gold in the world's largest exchange-traded products held at a record 70.82 million ounces. ETPs have drawn in well over half a million ounces of gold in the last month, reflecting demand among investors for the metal.

Buying in India, the world's largest gold consumer, has been evident for the past week, since the price fell below $1,700 an ounce, according to local dealers.

Silver rose by around 1.2 percent on the day to $33.77 an ounce, bringing the gold/silver ratio - the number of ounces of silver needed to buy one ounce of gold - below 50.0, indicating silver's relative outperformance over gold.

In other metals, platinum rose 0.4 percent to $1,631.99 an ounce, while palladium rose 1.3 percent to $689.72 an ounce.