Gold fell to its lowest in two weeks in Europe on Friday afternoon as the dollar surged against major currencies, luring investors away from bullion, while further noise about potential central bank gold sales added to bearish sentiment.
Dealers said direction was still linked closely to currency plays as financial markets tried to gauge whether the greenback's recovery would be sustained. A stronger US currency makes dollar-denominated gold more expensive for holders of the other currencies such as the euro and the yen.
Spot gold was quoted at $402.65/403.35 an ounce by 1543 GMT, having dropped as low as $401.95, its lowest since February 6. That compared with $409.30/410.00 quoted in New York late on Thursday.
"The stronger dollar is triggering some selling in gold at the moment," Dresdner Kleinwort Wasserstein trader Alexander Zumpfe said.
"I think this is a welcome excuse for some longs to liquidate their position ahead of the weekend after the precious metal failed to test fresh highs when the euro traded at its lifetime high against the dollar earlier this week."
Gold hit a 15-year peak of $430.50 an ounce on January 6 as the dollar fell to a lifetime low against the euro. But it failed to re-ignite this week when the euro set a new record high against the US currency.
The dollar stood at $1.2587/88 against the euro at 1530 GMT, well off the record high of around $1.2930 hit on Wednesday.
While some analysts were sceptical whether this marked the end of the dollar's two-year downtrend, the euro's inability to hold on to recent record highs meant euro bulls were starting to question its ability to rise much further, at least for now.
"I think there are some people who are starting to wonder whether the dollar bear market might be coming to an end," said Stephen Briggs, economist with Societe Generale.
"That is not to say by any means that that is correct, but I think one or two people are starting to think that. Were that to be the case, then you would expect gold to drop heavily."
But Peter Hillyard, head of metals sales at ANZ Investment Bank, said that the dollar's current gains could not yet be read as a signal that its downtrend was ending.
Traders were also eyeing comments from European Central Bank Governing Council member Klaus Liebscher, who is also Austria's central bank governor and said his country would consider selling some of its 317 tonnes of gold if a new agreement was reached.
Fifteen European central banks agreed five years ago to limit gold sales and the pact is due to expire in September this year.
Liebscher declined to comment on how much the Austrian National Bank might sell.
In other precious metals, silver stumbled on the back of gold's losses and a more static base metals complex.
Spot was quoted at $6.47/6.49 an ounce against $6.64/6.66 last quoted in New York on Thursday.
Platinum dropped to $845.00/850.00 from $853.50/858.50 quoted late in New York on Thursday, while palladium stood at $228.00/233.00 from $237.50/243.50.
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