Gold prices rose Friday, reversing early losses fuelled by a stronger U.S. dollar, as investors bought the metal to hedge against currencies' volatility and debt default risks in Europe.
U.S. gold futures for April delivery ended $3.40 higher at $1,122.10 an ounce at 3:38 p.m. EST on the COMEX division of the New York Mercantile Exchange.
"Investors are buying gold as a hedge against currencies' volatility," said Carlos Sanchez, a metals analyst with CPM Group. "Gold seems to be consolidating near the $1,130 an ounce area."
Gold priced in euros hit a record high of 826.35 euros an ounce as investors sought to diversify away from the beleaguered single currency.
Spot gold was bid at $1,119.50 an ounce at 3:38 p.m. EST against $1,111.40 late in New York on Thursday, having earlier touched a low of $1,098.55.
The metal's usual relationship with the U.S. currency - strength in which normally weighs on the precious metal - has weakened as fears over the outlook for paper currencies in general lifted interest in bullion as an alternative asset.
The dollar hit an eight-month high against a currency basket on Friday, extending gains after the Federal Reserve's surprise decision to raise its discount rate, its first hike in the rate since mid-2006.
Emergency lending
In its first interest rate move since December 2008, the Fed lifted the emergency lending rate it charges banks to 0.75 per cent from 0.5 per cent, but insisted borrowing costs would not rise for consumers or companies.
"This development ... is near-term gold-bearish, as it reduces liquidity," HSBC analyst Jim Steel said in a note. "Highly accommodative monetary policies have been an important element in the gold rally."
He noted, however, the Fed's assertion that the change was not expected to lead to tighter financial conditions or lead to a change in the outlook for monetary policy.
"If this implies monetary policy will remain lax, then the sell-off may be brief," he said.
On the wider markets, European shares snapped a four-day winning streak to fall as banks suffered after the Fed announcement, while U.S. stocks slipped at the open.
Among other commodities, oil prices recovered after earlier falling $1 a barrel following the Fed move. Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation.
Physical demand for the precious metal was relatively lacklustre, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, unchanged for a second session on Thursday.
Buying in India, the world's biggest gold consumer, slackened. "Caution typically sets in after a big fall," said one Mumbai-based gold dealer.
Silver was at $16.27 an ounce, against $15.84, with platinum at $1,532 an ounce, against $1,514, and palladium at $437, against $429.50.