Gold falls with dollar rise, may slip further

By Atul Prakash

LONDON (Reuters) - Gold fell on Monday after erasing overnight gains, as the dollar's recovery against key currencies lowered the metal's appeal as an alternative investment.

The metal, traditionally seen as a safe-haven asset, did not react to news that an earthquake with a magnitude of 7.5 struck Sichuan province in southwest China.

Gold rose as high as $889.10 an ounce and was quoted at $881.95/882.95 at 6:20 a.m. EDT (1020 GMT), against $886.30/888.30 in New York late on Friday, when it hit a 10-day high of $889.80.

"We could see gold prices dip below $850, if physical demand remains soft," said Suki Cooper, precious metals analyst at Barclays Capital.

"But overall, a number of positive drivers are still continuing to underpin gold prices," she said referring to strong oil prices.

The dollar gained to close in on a two-month high against a basket of currencies, as a slight rise in risk appetite and growing speculation of an end soon to cuts in U.S. interest rates boosted the U.S. currency.

Weak economic data suggesting that Australia and New Zealand may be heading for rate cuts, pushed down the high-yielding currencies of both countries. Lower rates would trim their rate advantage against other currencies including the dollar.

A firmer dollar makes gold costlier for holders of other currencies and often lowers bullion demand. The metal is also generally seen as a hedge against oil-led inflation.  Continued...