Gold finished higher on Friday, marking its second straight weekly gain, as the euro firmed, U.S. and European shares fell and the U.S. consumer price report supported the view that the Federal Reserve has leeway to keep up its monetary easing.
U.S. consumer price data recorded the largest increase in nearly four years in February, as the cost of gasoline surged. Excluding food and energy, however, the gain was only 0.2 percent, slower than January's 0.3 percent pace.
Despite the benign inflation reading, the dollar skidded from a seven-month high against a basket of currencies. The U.S. CPI data affirmed expectations that the Federal Reserve will continue its bond-buying program for the foreseeable future.
"It caught us a little bit by surprise that the dollar was weaker against the euro. With all the economic data lately, I would think that it would be stronger. But with the Fed meeting next week, I think a lot of people don't want to make bets ahead of it," said David Lee, a gold trader at Heraeus Precious Metals Management in New York.
Gold prices were poised for a second straight week of small gains, with most players sidelined in anticipation of the Federal Reserve's policy setting meeting next week. But in recent sessions gold has been pressured by a strong dollar, which has benefited from good news on the U.S. economy, luring foreign buyers into U.S. assets on expectations that U.S. growth is outperforming other major countries.
Lee noted that trading volumes have been low and percentage changes small all week.
Despite U.S. data showing healthier economic readings than expected all week long, the U.S. central bank was seen as having scope at its March 19-20 gathering to decide it will keep pumping money into the economy to bring down unemployment.
Officials at the central bank meet next week to assess the economy and are widely expected to keep purchasing $85 billion in bonds per month to spur even stronger growth.
Chairman Ben Bernanke has already signaled he believes the costs of inaction are greater than continued stimulus. Still, the strong data series have given gold investors reason to pause ahead of the policy meeting on worries that the Fed may reconsider the need for more quantitative easing, or QE.
"No one really knows what's going to happen next week. But if Bernanke even hints at any slowing down on QE, I think gold and other commodities will probably sell off," said Lee.
Accommodative monetary policies favor gold, because low interest rates encourage investors to put money into non-interest-bearing assets.
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"The Fed said is going to expand its balance sheet for a while, and for that reason inflation and inflation-related data are not a concern, whereas it is clearly a factor for gold that monetary easing in key markets continues," Danske Bank analyst Christin Tuxen said.
Gold also found strong support from a rebounding euro, which had reached three-month lows against the dollar in the previous session, analysts said.
"We see this rebound continuing in the short term, and this may reflect some near-term upside for gold," Tuxen said.
Analysts said the prospect of EU leaders looking at short-term ways of boosting faltering euro zone economies may lift the euro against the dollar.
A weaker dollar makes commodities such as gold cheaper for holders of other currencies.
U.S. and European shares fell on Friday, reversing from recent multi-year highs as investor appetite for riskier assets cooled.
One gauge of investor interest, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, were unchanged at 1,236.307 tonnes on March 14 from a day earlier. Even so, they have dropped 3.432 tonnes so far this week - on course for an 11th week of decline.
Signs of investor fatigue and higher downside risks to the gold outlook led Barclays analysts to cut their 2013 price forecast by 7.4 percent to $1,646 an ounce. Barclays did say it saw some scope for gold to gain traction, given the debt ceiling debate in the United States, scheduled for May.
Spot silver fell 0.21 percent to $28.72 an ounce.
Platinum was even at $1,586.49. The metal has returned to trade around parity with gold again this week on worries over auto demand growth in Europe, which mostly uses platinum loadings in auto catalysts to clean up exhaust emissions. Palladium added 0.55 percent to $771.72.