By Zandi Shabalala
ISTANBUL (Reuters) - Gold slipped on Friday as the dollar gained but was still on track to finish the week higher, clawing back recent losses on higher demand.
It ended the last three weeks on the back foot as the dollar, in which it is priced, advanced with upbeat U.S. economic data which raised the expectation of an interest rate increase soon.
A rise in U.S. rates increases the opportunity cost of holding non-yielding assets such as bullion and creates a flight to investments that may offer higher returns.
Spot gold was down 0.2 percent at $1,263.86 an ounce at 0915 GMT. It was headed for a weekly gain of 1 percent, clawing back part of the 6.5 percent shed over the last three weeks.
U.S. gold futures fell 0.2 percent to $1,265.
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"The dollar is still most important driver of gold movements. We have a bit of the dollar sentiment as well as behaviour on the technical side of attempts to price higher, then losing interest," said ABN AMRO commodity strategist Georgette Boele.
Gold demand from Asia, including China, India and exchange-traded funds (ETF) have propped up prices.
"There is accelerating physical gold demand in Asia and particularly in India which has helped prices," Commerzbank commodity analyst Carsten Fritsch said, adding that Indian demand had improved from lacklustre sales last year.
Holdings of the SPDR Gold Trust, the world's largest gold-backed ETF, rose 0.31 percent to 970.18 tonnes on Thursday. SPDR holdings have risen 2.3 percent so far this month.
MKS PAMP Group said in a note that ETF inflows continued to support gold. "However, dollar strength is likely to weigh upon moves higher over the short term amid euro and pound weakness".
The dollar index, which measures the greenback against a basket of currencies, was up 0.2 percent at 98.505. It touched a new seven-month high of 98.564 on Friday.
A slew of data including U.S. home resales and unemployment filings appeared to indicate an improving U.S. economy that would support a rate hike later this year.
Silver fell 0.3 percent to $17.46.
Platinum was down 0.5 percent at $929.40. Palladium fell 0.9 percent to $623.70 after dipping to its lowest since July 13.
(Additional reporting by Nallur Sethuraman in Bengaluru; Editing by Amrutha Gayathri/Ruth Pitchford)