Gold holds below two week high on robust dollar

Gold held below a two week peak, its safe haven appeal dulled with the dollar near a four year high and growing signs of strength in the US economy.

The dollar held steady on Tuesday after European Central Bank officials raised the prospects of further stimulus and as investors waited to see if Japan's leader would call a snap election after the country slipped into recession.

A stronger greenback makes dollar denominated gold more expensive for holders of other currencies and also weakens its appeal as a hedge.

Mr James Gardiner trader of MKS Capital said that "Movements in the dollar continue to be the major catalyst for moves in gold, with sharp rallies predominantly the result of short covering. There should be initial support on the downside around USD 1,181 to USD 82 and on the topside USD 1,200 will be the key resistance."

Spot gold was steady at USD 1,186.50 an ounce by 0304 GMT, just down from a two week high of USD 1,193.95 hit in the previous session.

US economic data on Monday also hurt gold's appeal as a hedge. While US manufacturing output rose only modestly, other data showed a rebound in factory activity in New York State.

Holdings in SPDR Gold Trust, the world's largest gold-backed exchange traded fund, rose 0.33 percent to 723.01 tonnes on Monday, the first increase since November 3.

In a reflection of investor sentiment, however, holdings in the fund which marks its tenth anniversary were still near a six-year low. The ETF counts hedge fund Paulson & Company as its top investor.

Elsewhere, India's central bank is in talks with the government to increase curbs on gold imports, reflecting policymakers' concerns that a jump in inbound shipments will worsen the country's trade deficit.

More curbs could hit demand from India, the second biggest gold consumer, and add pressure on gold prices.