(Reuters) - Gold prices firmed in Europe on Friday, supported by a retreat in the dollar versus the euro, and by persistent concerns over sovereign debt levels in the euro zone after Moody's cut Ireland's credit rating.
Spot gold was bid at $1,375.45 an ounce at 1028 GMT against $1,370.46 late in New York on Thursday, having slipped to a near three-week low of $1,361.35 an ounce in that session.
"We are into a typical end-of-year scenario now, where order flow more than fundamentals drives the market," said Saxo Bank senior manager Ole Hansen.
"Yesterday's story about CFTC limits was enough to make a few investors calling it a day and some position squaring was seen," he said. "Today we are jumping on the weaker dollar and retracing back up again.
"It will be choppy for the rest of the year but unless we see any dramatic news investors are happy with their positions based on the expectations for further price increases into 2011."
U.S. gold futures for February delivery rose $5.40 an ounce to $1.376.40.
Better-than-expected German IFO data helped the euro rise 0.8 percent versus the dollar, weakness in which increases gold's appeal as an alternative asset and makes assets priced in the U.S. unit cheaper for holders of other currencies.
But the single currency remains vulnerable after the Moody's cut and as an agreement by European Union leaders on Thursday to set up a permanent crisis management mechanism failed to calm fears about the region's debt crisis.
EU leaders agreed at the summit to make minor changes to the group's governing treaty to establish a permanent mechanism from mid-2013 to resolve sovereign debt problems.
"The EU summit of Heads of State and Government has not produced any surprises," said Commerzbank in a note. "Merely the key points of a permanent crisis mechanism, drafted by finance ministers ahead of the meeting, have been confirmed."
"Uncertainty among market players is likely to continue."
POTENTIAL OPENED
Thursday's move below $1,372.30 an ounce opens up the potential for a move down toward $1,351.50 an ounce, Swiss bank UBS said in a note.
A break of that level could mean a further move down to $1,330, while a move through $1,408 would be needed to signal an end to the correction, it added.
Investor demand for gold-backed exchange-traded funds remained light, with holdings of the world's largest, New York's SPDR Gold Trust, falling to a two-month low of 1,283.757 tons on Thursday.
