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Gold rallies to three-week high after surprise China rate cut

Twenty Swiss francs gold coins, known as Vrenelis, are pictured at Jolliet numismatic shop in Geneva November 19, 2014. REUTERS/Denis Balibouse/Files

By Jan Harvey

LONDON (Reuters) - Gold climbed back above $1,200 an ounce on Friday after a surprise rate cut by China fuelled expectations demand could rise in the world's biggest gold consumer.

China cut its benchmark interest rates for the first time in more than two years on Friday to lower borrowing costs and lift a cooling economy that is on track for its slackest annual growth in 24 years.

"Any measures that accelerate the spending power of the Chinese public are bound to be positive for gold," Mitsubishi analyst Jonathan Butler said.

"(This could mean) additional spending power for Chinese consumers to buy jewellery and investment products."

Spot gold was up 1.1 percent at $1,207.10 an ounce at 1312 GMT, while U.S. gold futures for December delivery were up $15.20 an ounce at $1,206.10. Earlier spot gold touched its highest in three weeks at $1,207.70.

A sharp drop in the euro versus the dollar had pressured gold to a session low of $1,186.84 an ounce, after European Central Bank chief Mario Draghi said inflation expectations were declining to levels that were very low, keeping the door open for further monetary easing soon.

Gold is priced in the dollar and tends to fall when the U.S. currency strengthens. A rally in the dollar index earlier this month knocked gold to a 4-1/2 year low at $1,131.85.

"Overall the dollar continues to be leading the way, therefore I have to say that despite the demand for physical, I would think that because of the weakness in the euro, we have a chance of testing the lows again," MKS head of trading Afshin Nabavi said.

Traders were also digesting news of central bank sales and purchases. Ukraine slashed its gold reserves by more than a third in October, data from the International Monetary Fund showed, as the near-bankrupt country reels from fighting a pro-Russian separatist movement in the east.

Russia raised its gold holdings for a seventh straight month in the same period.

Among other precious metals, silver was down 0.4 percent at $16.16 an ounce, while spot platinum was up 0.3 percent at $1,212 an ounce and spot palladium was up 0.8 percent at $774.25 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; editing by Jason Neely)