UPDATE 3-Gold weakens on firmer dollar, ETF holdings rise

(Recasts, changes dateline pvs SINGAPORE)

By Atul Prakash

LONDON, May 7 (Reuters) - Gold eased on Wednesday as a rise in the dollar against the euro lowered the metal's appeal as an alternative investment, but strong oil prices limited declines.

Spot bullion <XAU=> hit a high of $881.05 an ounce before slipping to $874.20/875.20 at 0956 GMT, against $877.40/878.60 late in New York on Tuesday and a record high of $1,030.80 on March 17.

"Tomorrow's ECB rate-setting meeting might reverse the euro/dollar move, but another test of downside support around $850 now appears more likely for gold in the short-term rather than a push to $900," said Tom Kendall, metals strategist at Mitsubishi Corporation.

"The recent disconnect between the price of gold and oil means that weakness in the price of crude is not a prerequisite for a sell-off in bullion."

The dollar rose ahead of a European Central Bank meeting on Thursday, heading towards a two-month high against a basket of currencies after a Federal Reserve official's comments added to a view that the cycle of aggressive U.S. interest rate cuts may be ending.

Kansas City Fed President Thomas Hoenig said late on Tuesday that rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation, prodding the euro towards a five-week low versus the dollar. [ID:nN06528406]

A firmer dollar makes gold costlier for holders of other currencies and often lowers bullion demand. The metal is also generally seen as a hedge against oil-led inflation.