By Clara Denina
LONDON (Reuters) - Gold fell on Wednesday as European equities edged higher and the dollar hit a four-month high following strong U.S. economic data, which raised expectations that the Federal Reserve may raise rates before the end of the year.
Spot gold was down 0.4 percent to $1,325.91 an ounce at 1019 GMT, while U.S. gold dropped 0.4 percent to$1,327.20 an ounce.
The dollar was up 0.1 percent against a basket of six currencies, after hitting its highest for four months on data showing U.S. housing starts surged more than expected in June, underpinning a theme of strength in the U.S. economy.
"The probability of a U.S. Federal rate hike has increased as of today. Some expectations of a rate hike have come back," said OCBC Bank analyst Barnabas Gan.
Gold, which has risen 25 percent this year, is highly sensitive to rising rates, which increase the opportunity cost of holding non-yielding assets such as bullion, while boosting the dollar, in which it is priced.
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The metal was also dragged lower by advancing European equities, which increased investor appetite for risk.
"There is a return in risk sentiment across the market in general right now, as you have more monetary stimulus packages from central banks," Mitsubishi Corp analyst Jonathan Butler said.
"Although more stimulus would also favour no-yielding gold, when there's pro-risk trading, there's aslo a retreat of some of those safe-haven elements that have supported the metal."
The International Monetary Fund, however, cut its global growth forecasts for the next two years on Tuesday, citing uncertainty over Britain's looming exit from the EU.
Bullion gained $100 in the two weeks following Britain's vote to leave the European Union, as worried investors started putting their cash into safe-haven assets, before falling back.
"There are still some headwinds to growth and this may lift safe-haven demand should the implications of Brexit start to unwind," OCBC Bank's Gan said.
Spot gold is biased to fall to $1,313 per ounce after completing its consolidation, said Reuters technical analyst Wang Tao.
Spot silver fell 0.7 pct to $19.75 an ounce.
Spot platinum was down 0.4 percent at $1,084.50, while palladium, which touched an eight-and-half-month high on Tuesday, was down 0.5 percent at $653.80.
(Additional reporting by Nallur Sethuraman and Vijaykumar Vedala in Bengaluru; Editing by William Hardy)