Gold steadies after U.S. inflation data

By Jan Harvey

LONDON (Reuters) - Gold steadied on Wednesday, recovering earlier losses, as traders put aside initial concerns that a surprise drop in U.S. inflation could point to a more sustained phase of falling prices, denting gold's allure as an inflation hedge.

The dollar's nudge off highs against the euro also relieved downward pressure on gold, which is often bought as an alternative investment to the U.S. currency.

Prices remain rangebound amid conflicting signals on inflation and the outlook for equities, analysts said.

Spot gold was bid at $890.25 an ounce at 1522 GMT (11:22 a.m. EDT) against $888.85 late in New York on Tuesday. U.S. gold futures for April delivery on the COMEX division of the New York Mercantile Exchange rose 10 cents to $891.00 an ounce.

U.S. inflation data for March showed a dip of 0.1 percent in the consumer price index, against expectations for a rise of 0.1 percent. Consumer prices recorded their first annual drop since 1955.

"Short term, these figures are obviously not bullish for gold, but in the longer term you have to look past the current fall in inflation," said Standard Bank analyst Walter de Wet.

"With all the quantitative easing and low interest rates, inflation is going to head up again. That is why gold only moved a few dollars."

The precious metal is often bought as a hedge against rising inflation, and prices can be dented by deflationary signals.

On the foreign exchange markets, the dollar edged a touch off the session highs it reached versus the euro in the wake of the numbers, but remained stronger.

A firmer dollar tends to weigh on gold, which is often bought as an alternative investment to the U.S. currency.

The euro earlier fell against the dollar after European Central Bank Governing Council member Axel Weber said the central bank will announce a package of "non-standard measures" in May.

Equity markets also moved higher, helped by a better-than-expected report on manufacturing activity in New York state.

Gold remains largely rangebound as buyers await clearer signals on the outlook for the financial sector and the equity markets. Any rise in risk aversion is likely to benefit gold.

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"We are stuck in a range here," said Saxo Bank senior manager Ole Hansen.