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)

The dollar fell against the euro on Monday as talk of an imminent bailout deal for the three U.S. automakers boosted stocks in Europe and Asia and helped to quell extreme levels of risk aversion.

The rise of 5 percent in benchmark indexes outside the U.S. sent the low-yielding Japanese yen and U.S. dollar lower against the Australian dollar, sterling and other currencies perceived in the market to have higher risk.

Analysts said expectations that a rescue of the “Big Three” U.S. automakers will materialize, along with more stimulus measures from governments around the world was helping to calm a recent sell-off in risky assets which has send yields on three-month Treasury bills to near zero.

The “U.S. dollar is sharply lower against the major currencies as markets anticipate a large fiscal stimulus package in the U.S. and a U.S. auto bailout as early as today or tomorrow,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York in a research note to clients.

In early New York trade, the euro traded 1.1 percent higher at $1.2877, after jumping as high as $1.2915, its highest level since November 28.

The single currency rose 1.6 percent to 120.20 yen, having climbed as high as 120.99 yen, according to Reuters data, as the euro was boosted by higher regional shares.

Stock market gains are seen as a sign of easing risk aversion and can curb demand for the yen, which rises when risk-taking declines and carry trades are unwound.

“Higher stocks are driving everything at the moment and currencies are trading in line with this, with higher yielders gaining and lower yielders on the defensive,” said Adam Cole, global head of FX Strategy at RBC Capital Markets.

The equities rally also benefited the pound, which gained 0.8 percent against the dollar to $1.4870, while the higher-yielding Australian dollar jumped 2.5 percent to $0.6637.

The Australian dollar, whose 4.25 percent yield for the moment continues to dwarf the yen’s 0.3 percent even as the Reserve Bank of Australia continues to slash interest rates, rose nearly 3 percent to 61.90 yen.

Against the yen, the dollar traded 0.5 percent higher at 93.32 yen, but off the session high of 93.91 yen.

BAILOUT EYED

White House and Congressional negotiators sought on Sunday to settle remaining differences over an emergency rescue for the struggling auto industry.

Hopes for a bailout gained traction after Friday’s disappointing employment figures encouraged U.S. lawmakers to take action to shield the economy from the credit crunch and a global recession.

U.S. President-elect Barack Obama also said on Saturday that his plan to create at least 2.5 million new jobs included the largest infrastructure investment since the 1950s and a huge effort to reduce the U.S. government energy use.

“President-elect Obama’s plans to introduce the largest infrastructure package since the 1950’s and progress on an auto sector rescue package have captured the market’s imagination and is weighing on the dollar,” said Brown Brothers Harriman’s Chandler.

Despite the dollar’s drop on Monday, analysts do not expect the U.S. currency to continue losing ground, as major concerns remain about the possibility of a deep global recession, which many say will keep investors extremely wary of taking on risky positions.

“We remain wary about the impact of escalating bad news on the economic front, which we believe will keep risk aversion elevated for some months to come,” analysts at Calyon said in a research note.

Nick Olivari, Naomi Tajitsu, Andrea Ricci
NEW YORK, Dec 8 (Reuters)