By Jan Harvey
LONDON (Reuters) - Gold eased on Friday as a recovering dollar pulled prices from 3-1/2 month highs, but doubts over whether the Federal Reserve will press ahead with a U.S. rate rise this year kept the metal on track for a second weekly rise.
Prices continued a retreat that began on Thursday after upbeat U.S. inflation data calmed some concerns about the strength of the U.S. economy and boosted the dollar. The U.S. currency extended gains on Friday after industrial output data.
Spot gold was down 0.1 percent at $1,181.66 an ounce at 1400 GMT, while U.S. gold futures for December delivery were down $5.40 an ounce at $1,182.10. Spot gold is on track to rise 2 percent this week after peaking at $1,190 an ounce, its strongest since late June.
Gold is currently holding near its 200-day moving average, a level it broke this week for the first time since May. However, it has struggled to maintain the week's early gains, as some are still betting on a rate hike later this year.
"There is still high uncertainty in the market about when the Fed will raise rates," Commerzbank analyst Daniel Briesemann said. "Until we have seen the first interest rate hike, or at least the announcement of it, gold should still be under pressure."
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Gold also lost some support from physical markets, where consumer buying interest dropped due to the recent price rally. Prices on the Shanghai Gold Exchange were at a discount on Friday against a premium of $2-$3 earlier in the week.
Prices have risen more than 5 percent since a weak jobs report on Oct. 2 pushed out expectations for a Fed rate rise. The metal benefits from ultra-low rates, which cut the opportunity cost of holding non-yielding assets.
Investor sentiment towards gold has improved. Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold shares, rose another 5.1 tonnes on Thursday to 700 tonnes, their highest since mid-July.
That brought the fund's inflow for the week so far to 12.8 tonnes, the largest weekly rise since early February.
"We had slightly better U.S. data which saw the dollar rally, so that seems to have scared off some of the gold buyers for the moment," Societe Generale analyst Robin Bhar said.
"But if it can consolidate around here and build a base, that's a good platform," he said. "Some of the tailwinds are back in gold, in the sense of softer U.S. data, (and) the fact that a Fed rate hike is most unlikely this year."
Silver was flat at $16.09 an ounce, while platinum was down 0.2 percent at $1,001.50 an ounce and palladium down 1 percent at $694.75 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore, editing by David Evans)