LONDON: Gold fell to its lowest level in 7-1/2 months on Thursday on a strong dollar and as tensions in Ukraine appeared to ease, failing to benefit from weaker shares after an unexpected rise in U.S. jobless claims.
Spot gold slipped 0.7 percent to $1,240.30 an ounce by 1414 GMT, after dropping to its lowest since Jan. 31 at $1,238.15 in earlier trade.
U.S. gold futures fell $4.10 an ounce to $1,241.40.
"Broadly speaking this is a rather thin market not being driven by massive flows... the key issue is the U.S. dollar and its strength is weighing heavily on gold and that seems the prime driver," Sharps Pixley CEO Ross Norman said.
The dollar was on track for a ninth consecutive week of gains against a basket of currencies as expectations grow that the Federal Reserve might raise interest rates in 2015, while global shares fell after a surprise rise in the numbers of Americans filing for unemployment last week.
Higher interest rates would hurt the attractiveness of non-interest-bearing assets such as gold.
"The stronger dollar, interest rate expectations ahead of next week's (Fed policy meeting) are giving us a lot of negative information on gold's outlook," Societe Generale analyst Robin Bhar said.
"We've got a clear expectation that inflation is going to be low in the United States, which is another nail in gold's coffin."
Gold is usually seen as a hedge against inflation. The five-year U.S. breakeven inflation rate, a market measure of consumer price expectations taken from the spread between the five-year nominal Treasury yield and its inflation-linked counterpart, fell to its lowest in more than a year this week at 1.8068.
Demand for gold as insurance against risk was also curbed after Ukraine's president said on Wednesday that Russia had removed the bulk of its forces from his country, raising hopes for a peace drive now under way after five months of conflict in which more than 3,000 people have been killed.
The metal has risen around 4 percent since the beginning of the year, also helped by risk aversion during periods of high political tension in Ukraine and the Middle East.
The recent drop in gold prices attracted some bargain hunters with holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rising three tonnes on Wednesday to 788.72 tonnes - the first inflow in three weeks.
Dealers in Hong Kong, the main conduit for gold into China, said demand had picked up in recent days because of the drop in prices, but not in any robust way.
In India, the second-biggest buyer, demand is expected to pick up ahead of the Diwali festival, but import curbs could keep any gains in check.
"While gold may face further pressure in the current macro environment, a pick-up in physical demand would help stem the possibility for further losses," HSBC said in a note.
"Physical demand appears light despite gold's price decline so far in the month."
Other precious metals tracked gold lower. Silver was down 1.2 percent at $18.67 an ounce, having touched a three-month low.
Platinum fell to a seven-month trough of $1.363.40 an ounce, while palladium was down 0.7 percent at $840.25.
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