Gold near 2-1/2 week high on U.S. rate expectations

SINGAPORE (Reuters) - Gold edged lower on Wednesday after a five-day rally, but stayed close to a 2-1/2-week high on growing expectations the U.S. Federal Reserve would not raise interest rates until September.

Spot gold had eased 0.2 percent to $1,190.90 an ounce by 0737 GMT, but was not too far from a peak of $1,195.30 reached the session before.

The metal’s five-day rally as of Tuesday came after the Fed sounded a cautious note last week on the U.S. economy and the pace of any rate-hike.

“For the rest of this month, markets (will be) adjusting to the reality that the Fed is more dovish than previously expected,” said Phillip Futures analyst Howie Lee, adding that this would continue pushing gold prices higher.

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Prices could climb to $1,200 in the immediate future and$1,240 in the next quarter, Lee said.

Demand for gold, a non-interest paying asset, had been hurt by expectations of a near-term rate hike.

But since the Fed meet last week, consensus expectations for a U.S. interest rate increase have shifted, with most of Wall Street’s top banks now expecting the central bank to hold off until at least September, compared with previous expectations of June, a Reuters poll showed.

Investors rushed to cut long dollar positions after the Fed’s dovish steer on interest rates, sending the greenback crashing back from multiyear highs. The dollar stabilised against a basket of major currencies on Wednesday.

A weaker dollar also makes bullion cheaper for holders of other currencies, and increases its appeal as a hedge.

Gold investors will be closely monitoring U.S. economic data and comments from Fed officials this week for clues on the timing of the rate hike.

Fed policymaker James Bullard said on Tuesday that a first rate hike “sometime in the summer” would still leave monetary policy extremely accommodative, and that market expectations should be better aligned with those of the Fed considering the current “boom time” for the U.S. economy.

Some were waiting for prices to break the key $1,200 level to see how the metal would trade in the near term.

A strong break of the level could see more upside, but a sell-off is expected if the metal fails to hold at $1,200.

“Momentum indicators are now decidedly bullish,” said analysts at ScotiaMocatta. “However, the recent rally has yet to test the March 6th open at $1,198 or expected resistance at $1,200.”

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford and Prateek Chatterjee)

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