Spot gold traded steady on Monday, weighed down by a strong dollar after mass downgrades of euro zone nations by Standard & Poor's on Friday, while its safe haven appeal could benefit from renewed fears about the euro zone debt crisis.

Gold posted its biggest one-day drop in 2-1/2 weeks on Friday, as France and Austria were stripped of their coveted triple-A ratings amid the downgrades of nine euro zone nations, and Greece's talks with creditor banks stalled.

The single currency fell to its lowest against the dollar since August 2010, and was expected to remain under pressure.

There are a lot of risks still ahead of us and we don't think gold has priced in these risks, said Jeremy Friesen, commodity strategist at Societe Generale. It (the downgrades) is one of the incremental pushes for gold to appreciate.

Gold's climb will face the headwind of a strong dollar, but the appreciation of the greenback may not last long, he added.

Spot gold edged up 0.2 percent to $1,642.59 an ounce by 0712 GMT, rising above the 200-day moving average near $1,638.

Prices rallied 5 percent this year, boosted by safe haven bids on troubles in the euro zone and tension between Iran and the West over the past two weeks.

U.S. gold gained 0.8 percent to $1,643.40. Technical analysis suggested that spot gold could retreat to $1,600 during the day, Reuters market analyst Wang Tao said.

The advance in gold prices has yet to impress hedge funds and other speculators.

Money managers cut bullish exposure in U.S. gold futures and options in the week ended Jan.10, leaving the net length at its lowest level in nearly two years, according to data from the U.S. Commodity Futures Trading Commission.

Holdings of physically backed exchange-traded funds -- another gauge of investment interest -- showed little sign of revival. SPDR Gold Trust, the world's largest gold ETF, said its holdings stood at 1,254.159 tonnes, down 0.411 tonnes from the end of 2011.

Traders expect some selling from China this week, before markets in the country close for a week-long Lunar New Year holiday next week.

We may see some pressure from some Chinese investors who want to close their positions and lock down profits before they close shop for the holiday, said a Shanghai-based trader.

Gold jewellery demand in India, a major global market, is estimated to have risen 5 to 7 percent in 2011 and is set to grow a further 10 to 15 percent this year with bullion prices falling back after recent gains, the head of India's biggest jewellery retailer said on Sunday.