By Sumita Layek
BENGALURU (Reuters) - Gold prices touched a one-week high on Wednesday as the dollar softened and demand for the safe-haven metal got a boost on concerns surrounding Italy's plans to tackle budgetary deficit.
Risk appetite was hit after European Union (EU) officials expressed concerns about Italy's budget plan, which would widen the deficit significantly. The deficit blowout revived fears of the eurozone debt crisis.
However, the debt fears were tempered on reports that Italy will cut its budget deficit at a faster pace than expected.
Spot gold was up 0.2 percent at $1,205.66, as of 0505 GMT. Earlier in the session, the bullion touched a one-week high of $1208.31. It gained 1.3 percent on Tuesday in its biggest one-day percentage gain since Aug. 24.
U.S. gold futures climbed 0.2 percent to $1,209.50 an ounce.
"Gold has jumped a little bit on populist sentiments from euro zone, Italy deficit concerns, and fall in equities," said Benjamin Lu, commodities analyst, Phillip Futures.
"Overall, our assessment is it's a knee-jerk reaction. We are seeing a little bit of selling and buying activities supported by equity markets ... But it's still a dollar story. Gold prices are still very susceptible to the dollar."
The dollar index against a basket of six major currencies was down 0.2 percent.
Gold prices dropped for the past six months, losing over 11 percent, largely due to dollar strength, with the U.S. currency benefiting from a vibrant U.S. economy, rising U.S. interest rates and fears of a global trade war.
"Shorts are nervous of uncertainty around Italy at least and that may well continue with gold above $1,204-$1,206. It may appear that with this new stress the big shorts are more on the defensive," said Nicholas Frappell, global general manager, ABC Bullion, Australia.
"I expect with gold above $1,200, that $1,213 is the next target, at the top of the Daily Ichimoku cloud, which should prove resistive."
Gold is used as an alternative investment during times of political and financial uncertainty.
"Going forward, gold prices are subject to the U.S. dollar and how fast Italy's concerns will be removed or reduced," said Argonaut Securities analyst Helen Lau.
Meanwhile, holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell 0.32 percent to 23,721,571.86 ounces on Tuesday.
Among other precious metals, silver rose 0.7 percent to $14.74 an ounce, hovering close to previous session's $14.90, its highest in more than a month.
Platinum climbed 0.5 percent to $830.80 per ounce and palladium gained 0.2 percent at $1,053.65.
(Reporting by Sumita Layek and Vijaykumar Vedala in Bengaluru; Editing by Joseph Radford and Sherry Jacob-Phillips)
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