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LONDON (Reuters) - Gold rose back towards $1,625 an ounce on Thursday after a Chinese rate cut hurt the dollar, and as investors geared up for a Federal Reserve statement later which will be closely watched for clues as to the future direction of U.S. monetary policy.
China's central bank cut benchmark interest rates by 25 basis points in a surprise move to shore up slackening economic growth, its first rate reduction since the depths of the 2008/09 financial crisis. The dollar fell in response.
Investors are now waiting to scrutinize Fed chairman Ben Bernanke's testimony in front of a congressional committee for any sign of intent to further ease money supply. That would buoy gold's appeal as an alternative store of wealth to potentially volatile currencies
Spot gold was up 0.4 percent at $1,624.70 an ounce at 7:26 a.m. EDT (1126 GMT), off an earlier low of $1,612.64 an ounce, while U.S. gold futures for August delivery were down $8.70 an ounce at $1,625.50.
Prices have eased a touch this week after posting their biggest one-day rise in more than three years on Friday after disappointing U.S. jobs data reignited speculation that the Fed would unleash another round of monetary easing.
"Some of the poor U.S. data has got people thinking that there is going to be another round of quantitative easing sooner rather than later," Citigroup analyst David Wilson said. "I suspect Bernanke will at least soften his tone towards QE."
"I'm still optimistic for the second half of the year, on the expectations that we will see a weaker dollar through quantitative easing," he added.
The euro hit a session high against the dollar after the Chinese central bank cut benchmark deposit and lending rates, while European stocks rose more than 1 percent. <FRX/> .EU
Safe-haven German Bunds pared losses after falling in earlier trade, extending losses on hopes of a European policy response to Spain's banking problems and growing expectations of further U.S. monetary stimulus. .EU <GVD/EUR>
"The gold bulls are desperately hoping for further mention of some form of stimulus (from the Fed)," David Govett of Marex Spectron said in a note. "If some form of this is put on the table, then I expect gold will react very positively."
"If however, as I personally believe, the Fed leaves things as they are for the time being, this will be viewed as negative and gold will fall."
Indian gold prices fell almost 1 percent from the previous day's record high as the rupee hit its strongest in two weeks and global gold prices fell, though physical traders waited for bigger falls before buying. Scrap flow remained firm.
From a chart perspective, gold is looking better positioned for further gains after Friday's push higher, analysts who study past price moves for clues as to the futures direction of trade said. However, it has not firmly re-established an upward trend.
"Gold closed slightly higher (on Wednesday) but failed to hold its highs of the day or to clear resistance from the downtrend at $1,632," ScotiaMocatta said in a note.
"We remain bullish so long as gold stays above $1,600, but will need to clear resistance to bring in more buyers."
Kazakhstan's central bank said on Thursday it would increase the share of gold in its foreign reserves to 15 percent from about 12 percent, a day after announcing plans to cut its holdings in the ailing euro by a sixth.
Official sector gold demand has been a big support to the gold market in recent years, hitting its highest since the mid 1960s in 2011. Asian and emerging market banks have been most active, with Russia and Mexico among those raising reserves.
Silver was up 0.4 percent at $29.50 an ounce. It rose more than 3 percent on Wednesday to its highest since May 8, outperforming gold.
"The gold:silver ratio dropped sharply to 55.07 yesterday, after touching 57.36 - the highest level since October 2010 - on Monday," said UBS in a note.
"Silver's rally yesterday was even more impressive considering that our client flows were dominated by weighty sellers, although this does not come as a big surprise as an 'overreaction' in silver."
Spot platinum was up 0.6 percent at $1,464.75 an ounce, while spot palladium was up 0.5 percent at $626.47 an ounce.
Holdings of palladium-backed exchange-traded funds tracked by Reuters rose 1.5 percent or 27,225 ounces by close of business on Monday, their biggest one-day rise in absolute terms since February 2. The inflow went into Zurich Cantonalbank's palladium fund ZPAL.S.
Reporting by Jan Harvey; Editing by William Hardy