By Clara Denina and Jan Harvey
LONDON (Reuters) - Gold fell more than 2 percent on Thursday as robust U.S. growth data and news of a $10 billion cut to the Federal Reserve's monetary stimulus programme boosted the dollar, prompting traders to cash in gains in the metal.
The dollar index, measuring the greenback's performance against a basket of currencies, rose 0.6 percent in European early afternoon trade, also reflecting a sell-off in emerging market assets.
The U.S. central bank on Wednesday stuck to its plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets.
That further weighed on gold, which benefited from the Fed's stimulus measures after the financial crisis. The scheme kept interest rates low while stoking fears of inflation.
Spot gold was down 2.1 percent at $1,242.60 an ounce at 1503 GMT, while U.S. gold futures for February delivery were down $20 an ounce at $1,242.20. Selling accelerated as the metal broke support at $1,250 an ounce, traders said.
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"Orders were triggered below $1,250," VTB Capital analyst Andrey Kryuchenkov said. "The Federal Reserve reducing QE3 (third programme of quantitative easing) and U.S. Q4 GDP were positive for the dollar and the U.S. economy in general."
Wall Street also rebounded at the open on Thursday after data showed robust household spending and rising exports helped the U.S. economy to grow 3.2 percent in the fourth quarter.
While that was a slowdown from the third quarter's 4.1 percent pace, it was a far stronger performance than earlier anticipated and was welcome news in light of a 0.3 percentage point drag from October's partial government shutdown.
GRAPHICS:
2014 metal returns: https://bsmedia.business-standard.comlink.reuters.com/cag37s
2014 commod returns: http://link.reuters.com/reb25t
Gold/USD correlation: http://r.reuters.com/ryx52s
CHINA SUPPORT FADES
Support for gold prices from Chinese buying was likely to weaken with the Lunar New Year holiday starting on January 31, analysts said.
Volumes traded on the Shanghai Gold Exchange were just 1.5 tonnes on Thursday, compared with Wednesday's 8.4 tonnes and Tuesday's 14 tonnes.
And premiums for 99.99 percent purity gold fell to $4 an ounce on very thin volumes. They were as high as $20 earlier this month.
Bullion purchases from the mainland were strong in the run up to the holiday as gold is often bought for good fortune.
"With the Chinese New Year looming, activity in China has been winding down," UBS said in a note. "Volumes on the Shanghai Gold Exchanged dropped off significantly to 10 tonnes yesterday, the lowest level since the end of 2013."
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, saw a rare inflow of fresh investment on Wednesday. Holdings increasing by 2.10 tonnes to 792.56 tonnes, though that figure is still near a five-year low.
In other precious metals, platinum fell 1.8 percent to $1,382.24 an ounce, tracking losses in gold.
The metal drew little support from news that South Africa's AMCU union had rejected a 9 percent wage offer from leading platinum producers, prolonging a week of industrial action that has hit around 40 percent of the global supply.
Above-ground stocks of platinum are plentiful, cushioning end-users from the impact of the strikes, analysts said.
Silver fell 3.2 percent to $19.15 an ounce, and palladium was down 1 percent at $702.90 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Anthony Barker)