Gold flat as U.S. fiscal worries support dollar

A worker stands at his gold jewellery shop at the market of Khan el-Khalili in Old Cairo October 10, 2012.

SINGAPORE (Reuters) - Gold traded little changed on Thursday below the 2-1/2-week high hit in the previous session after U.S. President Barack Obama was re-elected, as a strong dollar largely put off buyers.

Obama's re-election gave markets a boost by ending weeks of political uncertainty, but now investors have shifted their focus to the "fiscal cliff" looming over the world's biggest economy: nearly $600 billion tax hikes and spending cuts which, if left unchanged, will begin in early 2013 and possibly push the fragile U.S. economy into deep recession.

Worries about the fiscal cliff are supportive of safe-haven gold, but a strong dollar, which hit a two-month high against a basket of major currencies in the previous session, curbed bullion's gains by making it more expensive for buyers holding other currencies.

"The dollar serves as a barometer of overall global risk," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.

"Now the global risk has moved to centre on the U.S. and what it means for that barometer becomes a little messy and hard to tell. The dollar should weaken as the Fed offsets any slowdown, which I expect to be the end result, but in the near term if the market is nervous, it will bid up the dollar."

Spot gold was little changed at $1,717.79 an ounce by 0742 GMT, after rising to a 2-1/2 week high of $1,731.40 in the previous session.

U.S. gold inched up 0.3 percent to $1,718.30.

Technical analysis suggested that spot gold looks neutral in the range of $1,702-$1,734 an ounce during the day, said Reuters market analyst Wang Tao.

Investors are now awaiting results of a European Central Bank policy meeting. The bank is expected to leave interest rates unchanged, even as the latest data showed a slowdown in Germany's manufacturing sector.

The lingering euro zone debt crisis and worries about the U.S. fiscal problems kept investors interested in gold.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose to 1,337.205 tonnes by November 7, its second-highest level after the all-time high of 1,340.521 tonnes hit in early October.

But buying slowed in Asia's physical gold market, as prices have risen more than 2 percent this week.

"No one is buying at this level, as people have bought a lot when prices dipped below $1,700," a Hong Kong-based gold dealer said.

(Editing by Himani Sarkar)