By Marcy Nicholson and Jan Harvey
NEW YORK/LONDON (Reuters) - Gold held near three-month highs on Friday, heading for its biggest weekly gain since mid-January, as soft U.S. consumer sentiment data weighed on the dollar and further diminished expectations for a near-term rise in U.S. interest rates.
The dollar eased against the euro in the wake of the report, allowing gold to extend a three-day rally that took prices to their highest since mid-February on Thursday at $1,227.04.
Spot gold was up 0.3 percent at $1,224.53 an ounce at 2:33 p.m. EDT (1833 GMT), while U.S. gold futures for June delivery settled up 10 cents an ounce at $1,225.30. Prices are up 3 percent this week.
Recent economic reports have supported market expectations that the economy is not strong enough for the Fed to start raising record-low rates from June.
Data released on Friday showed U.S. consumer sentiment fell more than expected this month, though an earlier report showed manufacturing activity growth in New York State accelerated in May after weakening for three consecutive months.
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"If the data remains soft in the United States, this rally has potential," Commerzbank analyst Eugen Weinberg said. "When data is more on the soft side, the market will be looking for indications on when the Fed will be raising interest rates."
Gold is sensitive to rate expectations, as higher rates increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
"Our view is that the underlying data is getting weaker and it has been weak for a while but I think there are still some in the market that seem to be holding out hope that maybe we will get a rebound in the U.S.," said Mike Dragosits, senior commodity strategist for TD Securities in Toronto.
"But that doesn't appear to be the case and that's why we're trading at the top end of these ranges."
Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Shares , fell 0.61 percent on Thursday to a four-month low of 723.91 tonnes.
Physical buying slowed in Asia on higher prices. In China, premiums eased about 50 cents to $1 an ounce over the global benchmark on Friday, from premiums of $2-$3 earlier in the week.
Silver was up 0.5 percent at $17.51 an ounce and on track for its biggest weekly gain in nearly two months. Platinum was up 0.5 percent at $1,164.44 an ounce, while palladium rose 1.3 percent to $791.50 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Kevin Liffey and Andrew Hay)