By Jan Harvey
LONDON (Reuters) - Gold prices fell on Wednesday, extending the previous session's retreat, as upbeat U.S. data lifted the dollar and boosted the appeal of cyclical assets such as stocks at bullion's expense.
The dollar index touched a one-month high on Wednesday and European stocks rose to a 5-1/2 year peak after strong trade data boosted expectations for U.S. growth, deflecting interest from gold as an alternative investment
Physical demand from major consumer China also eased off after a strong start to the week, dealers said.
Spot gold was down 0.4 percent at $1,226.80 an ounce at 1038 GMT, while U.S. gold futures for February delivery were down $3.40 an ounce at $1,226.20.
The metal is still up 1.8 percent this year after tumbling 28 percent in 2013, its first annual loss in 32 years, as the Federal Reserve geared up to taper the ultra-loose monetary easing programme that had helped drive gold to record highs.
"The market probably got a bit carried away at the beginning (of the year), helped by the firm rejection of the lows on Dec 31 and the news about strong Chinese demand, which now seems to have stabilized," Saxo Bank's head of commodity strategy Ole Hansen said.
"As we approach non-farm payrolls data on Friday traders will probably turn cautious again, considering the expectations for a continued improvement in the U.S. job market and thereby additional tapering over the coming months."
The non-farm payrolls are seen as a key indicator of the U.S. monetary policy outlook, given that the Fed has explicitly said it will await an improvement in the jobs market before it accelerates its tapering programme.
Traders are awaiting preliminary ADP jobs data later on Wednesday ahead of Friday's numbers, and the release of the minutes of the Fed's latest policy meeting at 1900 GMT.
"The ADP report will help firm up consensus for Friday's employment report," BNP Paribas said in a note. "We expect the release to show (an increase of 215,000), consistent with our estimate for payrolls on Friday.
"The FOMC minutes may be of more interest, as they will shed light on the Fed's decision to taper at the December meeting," it added.
Physical demand from China, which is expected to have taken over from India as the world's number one gold consumer last year, slackened on Wednesday from this week's strong levels, dealers said.
Chinese consumers had been picking up gold at a brisk pace earlier this week ahead of the Lunar New Year celebrations at the end of this month, boosting premiums in the world's top buyer of the metal.
Premiums eased to $17 on Wednesday from over $20 seen earlier this week. Trading volumes on Monday hit their highest in eight months but have since slowed.
Among other precious metals, silver underperformed, falling 1.8 percent to $19.51 an ounce. Spot platinum was down 0.5 percent at $1,403.25 an ounce, while spot palladium was down 1 percent at $731.80 an ounce.
The gold:platinum ratio, which measures the number of gold ounces needed to buy an ounce of platinum, held near the previous session's 2-1/2 year high of 1.15 as gold prices retreated.
(Additional reporting by A. Ananthalakshmi in Singapore; editing by Keiron Henderson)