Gold was at $941.75 per ounce at 1256 GMT, up from $938.05 quoted late in New York on Friday. The precious metal earlier hit an intra-day high at $942.50 but is some way off a two week high of $948.20 hit last Friday.

A cautious approach to risk kept global stock market gains in check, while crude held under $70 per barrel following a bearish report on demand from the IEA, sapping gold’s appeal as a hedge against oil-induced inflation.

Analysts said the precious metal was holding onto gains but lacking upward momentum as currency markets would be indecisive until U.S. non-farm payroll data was released on Thursday.

“The dollar is going to be critical, and as long as it continues to weaken that tends to mean that gold will slowly grind higher,” said Dan Smith, an analyst at Standard Bank.

“We’re looking at more risk averse behaviour in coming weeks, which we think will push gold higher,” he added.

DOLLAR STEADIES

The dollar slipped after data from the Chicago Federal Reserve showed U.S. economic activity remained extremely weak in May, consistent with a continuing recession.

The currency was under pressure last week following Chinese calls for a super-sovereign global reserve currency.

But the case for a dollar alternative was undermined on Monday when the central bank governor of the United Arab Emirates told Reuters that the prospect was difficult to contemplate and plans to replace the dollar would not succeed.

U.S. gold futures for August delivery strengthened to $941.90 per ounce, up 0.7 percent on the day.

Analysts also said the precious metal could be due for a slight correction following last week’s rally.

“The price of crude oil is still below $70 per barrel, and that (crude) has been a key driver of inflation fears and also the gold price,” said Jesper Dannesboe, an analyst at Societe Generale.

“We had the correction from $1,000 down to around $910, and then another correction upwards. Now I think we’re heading down again,” he added.

Reflecting concern that gold may have lost some of its appeal to investors, the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust , said its holdings remained at 1,125.74 tonnes as of June 26, when it fell 0.5 percent.

It is currently down 0.7 percent from a record volume of 1,134.03 tonnes, marked on June 1.

Further undermining physical demand, ETF Securities said the amount of gold it holds to back its Gold Bullion Securities exchange-traded commodity fund had declined 567 ounces on June 26.

Noncommercial net long U.S. gold futures positions fell 5.3 percent to 166,294 lots in the week to June 23 from 175,543 lots, a weekly report by the U.S. Commodity Futures Trading Commission showed.

In other precious metals markets, spot silver eased to $13.96 quoted late in New York on Friday, while platinumdropped to $1,185.50 and palladium rose slightly to $245.50.

LONDON, June 29 (Reuters)

Wall Street sustained heavy losses, extending a global stock market rout as the Dow opened below 7,000 for the first time since 1997, while the dollar hit its highest level against a basket of six major currencies since early 2006.

European Union leaders’ rejection of a mass bailout for Eastern Europe pushed the euro below $1.26, as did a survey showing euro zone manufacturers had their worst month in 12 years.

But the biggest blow came from American International Group , which announced a $61.7 billion fourth-quarter loss, the largest quarterly loss in U.S. corporate history. Earlier, Treasury threw a new $30 billion lifeline to the company.

Analysts said the news reaffirmed suspicion that more turmoil lies ahead, spurring investors to sell stocks for safer, dollar-denominated alternatives such as Treasuries.

“With all the negative news lately — today from the U.S. insurance sector and the European summit — the market is just not prepared to take on a lot of risk,” said Dustin Reid, senior currency strategist at RBS Global Banking & Markets in Chicago. “So you’re seeing people pile into the dollar.”

In New York, the euro was down 0.7 percent at $1.2578 , after hitting a session low of $1.2547, according to Reuters data. The dollar fell 0.3 percent to 97.19 yen .

The euro was hit hard after EU leaders rejected calls, led by Hungary, for a 180-billion-euro aid package to rescue Eastern European countries suffering through a deep recession. The EU agreed only to help countries on a case-by-case basis.

“It keeps alive the story that sovereign risk in Europe is marching higher as there’s still no coordinated package” to address the problem, said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York.

If not for heavy selling of the British pound against the euro, he said, the common currency would be vulnerable to a push toward the $1.2330-$1.2350 area last seen in late October.

Sterling tumbled to $1.3959, its lowest level since late January, before edging back to $1.3988 , still 2.2 percent weaker on the day.

‘ROLL CALL OF REASONS’ TO AVOID RISK

HSBC’s 12.5 billion pound ($17.7 billion) rights issue, launched at a deep discount after annual profit more than halved and bad debts soared in the United States, also weighed on risk appetite and pushed European stocks lower.

“There’s a roll call of reasons to stay risk averse — the news from AIG, HSBC and worries about Eastern Europe and that is benefiting the dollar,” said Geoffrey Yu, a currency strategist at UBS in London.

Outside the U.S. dollar, only the yen was seeing a bid among major currencies on Monday as it attracted moderate safe-haven buying as equity markets turned lower. The euro fell 1.1 percent to 122.24 yen.

“The global slump in equity prices appears to be offering a lingering lifeline to the Japanese yen, (though) quite why we’re unsure,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

The yen used to be seen as a safe-haven alternative but has lost some of its luster as data showed Japan’s economy shrank in the fourth quarter as exports fell sharply.

NEW YORK, March 2 (Reuters)