(Reuters) - Gold jumped to session highs on Friday after U.S. non-farm payrolls data for September came in much weaker than expected, knocking the dollar against the euro, but quickly surrendered gains as the U.S. unit fought back.
Spot gold hit a peak of $1,345.55, but quickly gave up gains to retreat to $1,333.10 an ounce by 1307 GMT, against $1,332.65 late in New York on Thursday. U.S. gold futures for December delivery fell 60 cents to $1,334.40.
The numbers, which showed U.S. employers shed 95,000 jobs last month against expectations for none to be lost, may increase expectations the Federal Reserve may move towards further measures to stimulate the flagging U.S. economy.
"A weak number equals increased likelihood of QE2, equals higher gold prices," said Saxo Bank senior manager Ole Hansen. "If we can move back above $1,340 today, it looks good heading into next week."
However, the dollar's resilience to the data may prove a significant barrier to renewed strength in the precious metal, he said. "(It) still feels like this correction may not have fully run its course, but the dollar will decide in the end."
Gold's near-10 percent rally from end-August to Thursday's record high at $1,364.60 an ounce had come largely on the back of expectations for further U.S. quantitative easing, which knocked the dollar 7.5 percent lower last month versus the euro, its worst monthly performance since Dec. 2008.
For a graphic showing expectations for quantitative easing to lift gold, click on: r.reuters.com/kaf27p
Gold prices fell below $1,330 an ounce earlier on Friday after a Federal Reserve official was quoted as saying the pursuit of further U.S. monetary easing was a "tough call", but moved higher after the payrolls report.
The dollar fell against the euro and hit a fresh 15-year low below 82 yen in the wake of the data, but quickly recovered to rise 0.4 percent versus the single currency.
The foreign exchange markets, which have a significant impact on gold, are now awaiting the annual meeting of the International Monetary Fund and World Bank this weekend.
GOLD ETF HOLDINGS DROP
Meanwhile the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust , reported a 13.4 tonne outflow on Thursday, the biggest one-day drop in its holdings since late July.
"It is striking that (yesterday's) price fall was accompanied by high outflows from the SPDR Gold Trust," said Commerzbank in a note. "Investors are clearly taking profits as prices fall.
"This is a sign, in our view, that the air gets more and more thin at the current price level, and it also shows that the swift rise in prices is probably largely due to short-term oriented financial investors."
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