By Manolo Serapio Jr
MANILA (Reuters) - Gold held near a two-week trough on Wednesday after sliding almost 2 percent in the previous session as upbeat U.S. economic data strengthened expectation that the Federal Reserve may be on course to raise interest rates this year.
The dollar also held on to broad gains following a rally that pushed bullion to its steepest single-day fall since April 30.
Spot gold was up 0.3 percent at $1,189.65 an ounce by 0635 GMT. It dropped to $1,185.35 on Tuesday, its weakest since May 12.
"I think the Fed would raise rates at least once this year and it's likely in September," said Howie Lee, an analyst at Phillip Futures.
While recent data suggested that U.S. economic activity was picking up after a first-quarter slack, Lee said the overall picture remains soft and the Fed may need more evidence before raising rates.
"There could be unwarranted optimism on the U.S. economy and I think we still need a few more months of solid data before we can conclude that the rebound is in place," he said.
A gauge of U.S. business investment spending plans rose for a second straight month in April and consumer confidence perked up this month, adding to signs economic growth was gaining pace after sputtering in the first quarter. U.S. new home sales also climbed last month.
The strong U.S. data was in line with Federal Reserve Chair Janet Yellen's upbeat comments last week that indicated the U.S. central bank is poised to raise interest rates later this year.
Yellen's comments had fuelled the dollar's rally to an eight-year high versus the yen and it also rose against the euro, making dollar-denominated assets such as gold more costly for buyers using other currencies.
INTL FCStone analyst Edward Meir said investors may be pricing in a firm U.S. economic recovery prematurely and that the next flash point could come on Friday when first-quarter gross domestic product could be revised to show a drop versus the initial estimate of 0.2 percent expansion.
"This, in turn, should jolt the markets into realising just how much more the U.S. economy needs to improve in order to get anywhere close to Janet Yellen's optimistic growth projections and possibly weaken the dollar in the process," Meir said in a note.
U.S. gold for June delivery edged up 0.2 percent to $1,189.30 an ounce.
(Reporting by Manolo Serapio Jr.; Editing by Richard Pullin and Subhranshu Sahu)
