By Clara Denina
LONDON (Reuters) - Gold dipped to a 3-1/2 week low on Monday, as the dollar firmed and expectations rose that the U.S. Federal Reserve will hike interest rates as early as June.
Bullion has been under pressure since the Fed last week released the minutes of its April meeting, which showed officials believe the U.S. economy could be ready for another interest rate increase next month.
Higher interest rates increase the opportunity cost of holding non-yielding bullion.
U.S. interest rates being kept too low for too long could cause financial instability in future and stronger market expectations for a rate rise are "probably good", St. Louis Federal Reserve President James Bullard said on Monday.
"The Fed minutes were clearly more hawkish than expected and this has resulted in some change in sentiment and there is now an increased likelihood that they may raise rates in June or July," ABN Amro analyst Georgette Boele said.
Spot gold fell to $1,242.63 an ounce, the lowest since April 28, in earlier trade and was down 0.5 percent at $1,245.99 an ounce at 1412 GMT. U.S. gold futures also dipped 0.5 percent to $1,246.80.
Gold extended losses after the dollar, which had earlier fallen against the yen after robust trade data from Japan, firmed to remain close to its highest in nearly two months against a basket of major currencies, reached last week after the Fed minutes.
A firmer dollar makes dollar-denominated assets such as gold more expensive for other currency holders.
"In the longer term we are not on a massively negative path for gold here because the Fed is only likely to raise rates gradually but in the shorter term a stronger dollar and uncertainty about the hike timing could weigh on gold," Danske Bank senior analyst Jens Pedersen said.
The Fed's policymakers are scheduled to speak this week and are expected to back the case for a rate hike within months. Fed Chair Janet Yellen will be at a panel event hosted by Harvard University on Friday.
"The comments from Yellen will absolutely be a test for the dollar and consequently for gold," ABN Amro's Boele said.
Holdings in the world's largest gold-backed ETF SPDR Gold Trust rose 1 percent to 869.26 tonnes on Friday, the highest since November 2013.
Spot silver dropped 0.7 percent to $16.39 an ounce, spot platinum was down 1.2 percent at $1,010.60 an ounce and spot palladium fell 1.3 percent to $549.22 an ounce.
(Additional reporting by Koustav Samanta in Bengaluru, editing by Susan Thomas and William Hardy)
