By Jan Harvey
LONDON (Reuters) - Gold hit fresh 2-1/2 week highs on Wednesday as upbeat German economic data drove the euro higher versus the dollar, and as expectations receded that a U.S. interest rate rise is imminent.
The single currency rose 0.6 percent versus the dollar after a robust German business morale survey fuelled expectations that a euro zone economic recovery is strengthening, extending gains after U.S. durable goods data missed expectations.
Spot gold was up 0.5 percent at $1,198.40 an ounce at 1313 GMT, having earlier touched its highest since March 6 at $1,198, while U.S. gold futures for April delivery were up $6.20 an ounce at $1,197.60.
Gold slid to four-month lows earlier this month as expectations grew that the Federal Reserve was on course to lift interest rates.
"(Gold is) grinding higher as traders are reluctant buyers at this stage... driven by lower bond yields and the current dollar wobble," Saxo Bank's head of commodity research Ole Hansen said.
"It's safe to say that the sentiment has returned to neutral," he added. "At the moment, many are struggling with the concept of having to turn bullish again considering the roller coaster it has been through so far this year."
The metal's five-day rally to Tuesday, its longest since January last year, came after Federal Reserve chair Janet Yellen sounded a cautious note last week on the U.S. economy and the pace of any rate hike.
Gold prices had been hurt by expectations for a near-term rate hike, which would lift the opportunity cost of holding non-yielding bullion while boosting the dollar. Gold is highly sensitive to moves in the U.S. currency, in which it is priced.
"A break over the 1.10 euro/dollar level will encourage buyers to test and possibly break the $1,200 price point (in gold)," Kitco Metals Inc said in a note on Wednesday.
Physical gold demand in Asia, which supported the market when prices were around $1,145-55, is looking sparse at current levels and is not providing the cushion seen previously, precious metals house MKS said in a note on Wednesday.
"Further, it feels that this demand is not likely to re-emerge in any meaningful quantities until prices get back around $1170-75," it added.
Among other precious metals, silver was up 1 percent at $17.05 an ounce, while spot platinum was up 1.1 percent at $1,147.24 an ounce and spot palladium was up 0.5 percent at $765.25 an ounce.
(Additional reporting by A. Ananthalakshmi; Editing by Janet Lawrence and Elaine Hardcastle)
