Gold fell in Europe on Wednesday as a 1 percent rise in the dollar outweighed potentially supportive news that the U.S. Federal Reserve is holding interest rates at record lows and extending quantitative easing.
Spot gold was bid at $1,196.80 an ounce at 5:49 a.m. ET, against $1,201.85 late in New York on Tuesday. U.S. gold futures for December delivery climbed 60 cents to $1,198.60.
The metal rose as high as $1,207.05 on Tuesday after the Fed kept interest rates at record lows and signaled a policy shift away from cutting back on quantitative easing.
The bank said it would use cash from maturing mortgage bonds it holds to buy more government debt.
But gold failed to sustain gains as the dollar bounced back from initial losses to rise strongly against the euro.
The return of quantitative easing and the continuation of the near-zero interest rate environment are supportive for gold, but they were already (priced in) to the market, said VM Group analyst Carl Firman.
He said the metal's link to the dollar was returning after breaking down earlier this year.
The correlation had reversed, to where strength in the dollar saw strength in the gold price, he said. (Now) we are back to ... the negative correlation.
The dollar rose against the euro and climbed 1 percent against a basket of currencies .DXY on Wednesday as investors pared back risk exposure in the wake of steps announced by the Federal Reserve to boost the economy.
Strength in the U.S. unit curbs gold's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.
On the wider markets, European shares fell 0.85 percent in early trade, and world stocks hit a 1-1/2 week trough after the Federal Reserve's assessment of the U.S. economy turned more pessimistic.
OIL, METALS SLIP
Among other commodities, oil prices fell below $80 an ounce, weighed down by strength in the dollar, while base metals such as copper also slipped as the market mulled economic and demand growth prospects.
As gold is a commodity, movements in the broader commodity sector have the potential to influence gold prices, HSBC analyst James Steel said in a note.
Gold's inclusion in the Goldman Sachs Commodity Index and CRB, as well as the Dow-Jones-AIG index, helps reinforce the positive relationship between gold and other commodities. Recent oil price weakness helped undermine gold.
From a technical perspective, gold is now looking vulnerable to further losses, although these are likely to be limited.
With daily momentum now in overbought territory and 10-day trendline support giving way, we look for a push back toward the midpoint of the $1,219/$1,156 range at the $1,180 area, said technical analysts at Barclays Capital in a note.
While allowing for an overshoot, with gold approaching a strong seasonal period, weakness should struggle to reach the larger $1,156/$1,154 range lows, they said, however.
Among other precious metals, silver was at $18.11 an ounce against $18.25, while platinum was at $1,534.10 an ounce against $1,539.50 and palladium was at $471.93 against $473.75.
Prices of the platinum group metals, which are primarily industrial in nature and are widely used in the automotive sector, have come under pressure from concerns about the pace of economic recovery.
Speculation (that) slowing industrial activity in the U.S. and China will reduce auto demand is weighing on the PGMs, said James Moore, an analyst at TheBullionDesk.com, in a note.
(Reporting by Jan Harvey; Editing by Jane Baird)