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Gold drops slightly in choppy trade as dollar pares losses

Customers look at gold jewellery displayed at a shop in Amman, Jordan July 27, 2015. REUTERS/Muhammad Hamed/Files

By Renita D. Young and Peter Hobson

NEW YORK/LONDON (Reuters) - Gold prices dropped on Wednesday in see-saw trade, first rising to the highest since Oct. 20, then sliding and hovering near session lows, as the U.S. dollar pared losses.

U.S. data showed a rise in retail sales data last month and an uptick in underlying inflation which cemented expectations for further U.S. interest rate hikes. This helped the U.S. dollar [.DXY] bounce off lows against a basket of currencies.

A weaker dollar makes gold cheaper for holders of other currencies. (.DXY) [FRX/] [US/]

Spot gold (XAU=) was down 0.2 percent at $1,277.51 by 1:41 p.m. EST (1841 GMT), after touching $1,289.09, the highest since Oct. 20. The metal remained up 0.8 percent for the week.

U.S. gold futures (GCcv1) for December delivery settled down $5.20, or 0.4 percent, at $1,277.70 per ounce.

The outlook for U.S. tax cuts that could stimulate economic growth was clouded after U.S. Senate Republicans created new political obstacles by linking the repeal of a key component of Obamacare to the tax reform plans.

"There's speculation that tax cuts could be a long time coming, meaning the Fed will not have to be as aggressive as it might have been," said Robin Bhar, head of metals research at Societe Generale.

ANZ analyst Daniel Hynes said Wednesday's inflation data could be a trigger to break gold from the $1,265 to $1,290 range in which it has traded since mid-October.

"The Fed wants inflation, but it’s just not happening. Rates have been low for so many years, you would think the inflation would be a lot higher, but it’s not," said Michael Matousek, head trader at U.S. Global Investors in San Antonio.

"If inflation would go higher, it would be easier for the Fed to raise rates."

U.S. stocks were lower as energy stocks remained under pressure after oil prices fell for a fourth straight day. [.N]

On the technical side, resistance was at the 50-day moving average around $1,292 and a Fibonacci level at $1,297.70, ScotiaMocatta analysts said.

In other precious metals, silver (XAG=) was down 0.4 percent at $16.95 an ounce, platinum (XPT=) rose 0.2 percent at $927.74 an ounce and palladium (XPD=) was down 0.4 percent at $981.75 an ounce after touching a two-week low of $973.40.

(Additional reporting by Vijaykumar Vedala in Bengaluru; editing by David Goodman and David Gregorio)