By Zandi Shabalala
LONDON (Reuters) - Gold prices fell to their lowest level in a week on Friday ahead of U.S. non-farm payrolls data due later in the day that is expected to reinforce expectations of an interest rate rise this month.
A strong reading of jobs data bolsters the likelihood of two rate increases expected by the market this year which would dent the appeal of non-interest yielding gold.
Spot gold was down 0.3 percent at $1,261.76 an ounce at 1202 GMT. It earlier touched $1,258.60, its lowest since May 26, and is on track for its first weekly decline in four weeks.
U.S. gold futures were 0.5 percent lower at $1,264.30 an ounce.
"At this stage the market is fully pricing in an interest rate hike but the question is will it be a dovish hike," said Ole Hansen, head of commodity strategy at Saxo Bank.
"Recently established long positions in gold are being reduced ahead of the jobs data and the potential signal that will send towards the June FOMC meeting."
Non-farm payrolls probably increased by 185,000 jobs last month, according to a Reuters survey of economists, after surging by 211,000 in April.
Federal funds futures implied traders saw a 96 percent chance of the U.S. central bank increasing key overnight borrowing costs by a quarter-point to 1.00-1.25 percent at its June 13-14 policy meeting, CME Group's FedWatch program showed.
U.S. factory activity ticked up in May after slowing for two straight months and private employers stepped up hiring, suggesting the economy is regaining speed and making interest more likely.
"We are bearish on gold short-term into the Fed hike. There is good room to fall back to $1,200 within the next three months," said Dominic Schnider at UBS Wealth Management in Hong Kong.
"The world economy is still in good shape, people are risk-on, inflation is levelling off, there is no real big inflation threat anymore, policy is normalising still."
Hansen said the failure for gold to break through $1,272 an ounce encouraged the liquidation of some of the long positions which flowed in last week.
In wider markets, global stocks hit a record high while the dollar strengthened, making gold more expensive for holders of other currencies. [MKTS/GLOB][USD/]
Among other precious metals, palladium was up 1 percent at $831.72 an ounce after earlier touching $835.90, its highest level since September 2014.
Silver was down 0.8 pct for the week and platinum was down 3 percent. Both are heading for their first weekly decline in four weeks.
(Additional reporting by Vijaykumar Vedala in Bengaluru; Editing by Greg Mahlich)
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