PRECIOUS-Dollar slide sets gold up for best week in two months

* Gold up over 2 pct this week

* Dollar hits more than one-year low, bond yields fall

* SPDR Gold Trust holdings down 4.3 pct this month

(New throughout with updated prices, milestones, market comment; adds byline, NEW YORK dateline) NEW YORK/LONDON, July 21 (Reuters) - Gold was set for its biggest weekly gain in two months on Friday as a surging euro dragged down the U.S. dollar to its weakest since June 2016, making bullion cheaper for holders of other currencies. Bond yields fell after European Central Bank President Mario Draghi said on Thursday the ECB was in no rush to scale back its asset purchase program. The greenback retreated against a basket of major currencies, with the dollar index hitting a more than one-year low in afternoon dealings.

Central banks have "taken a more dovish tone and the dollar is working in gold's favor," said Josh Graves, a senior market strategist with RJO Futures in Chicago. Gold is highly sensitive to rising interest rates. Lower yields help gold prices by reducing the opportunity cost of holding non-yielding bullion.

Spot gold was up 0.87 percent at $1,255.0601 an ounce

since June 26, and were on track for their largest weekly gain since May.

U.S. gold futures for August delivery settled up

$9.4, or 0.75 percent, at $1,254.90 per ounce and finished the week up 2.2 percent. While gold was benefiting from the dollar's weakness against the euro and the move in yields, its gains would be limited by expected interest rate rises by the U.S. Federal Reserve and it would remain in a $1,200-$1,250 range, ABN AMRO analyst Georgette Boele said. The Fed's rate-setting committee is due to meet on July 25 and 26. Gold broke through resistance at its technically important 100- and 50-day moving averages, both around $1,250. Falling bond yields and a weakening dollar have helped gold rise 3.9 percent from a low of $1,204.45 on July 10, but this was driven by short-covering and not physical demand, Julius Baer analyst Carsten Menke said. Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, have fallen 4.3 percent, or 1.2 million tonnes, this month.

In other precious metals, silver was up 1.18 percent

at $16.482 an ounce after touching $16.509, the highest since July 3. Silver was up 3.3 percent this week, on track for the largest weekly gain since January.

Platinum rose 0.87 percent to $934.35 an ounce and on track to end the week up 2.1 percent. Palladium was up

0.20 percent at $844.22, but set for a weekly fall of 1.6 percent.

(Additional reporting by Nithin Prasad and Arpan Varghese in Bengaluru; Editing by Bernadette Baum)