SINGAPORE, Sep 13 (Reuters) Gold dropped on Thursday as the dollar bounced against the euro, with investors cautious ahead of next week's Federal Reserve meeting, which may offer direction to precious metals and currencies.
''A lot will depend on the extent to which investor interest in gold is sustained,'' said David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney.
''I think in the near term, there may be some factors that are supportive for gold, but longer term, I think there are still some questions about whether gold would be able to hold at these levels,'' he said.
But a brightening sentiment for gold, partly driven by a plan by Newcrest Mining Ltd.
''It certainly isn't impossible for gold to reach that level,'' said Moore.
Gold hit an all-time high of $850 an ounce, fixed in London on Jan. 21, 1980.
The metal has rebounded more than 10 percent since falling to a seven-week low of $641.10 hit in mid-August, when investors sold gold to raise cash to cover margin calls on losses triggered by a meltdown in the U.S. subprime mortgage market.
''If you wonder why there's no follow through to $720 or $730, that's because speculators, gold miners, hedge funds and central banks are selling at these levels,'' said a dealer in Singapore.
Gold and gold receivables held by euro zone central banks fell by 60 million euros to 171.94 billion euros in the week ending Sept. 7, the European Central Bank said on Tuesday, adding that the sales were consistent with the 2004 Central Bank Gold Agreement.
''The chance for the Fed to reduce interest rate is there, but we don't know by how much. There may be some liquidation or unwinding of positions after the Fed meeting,'' said the dealer in Singapore.
''I think $720 is the next resistance but I also look at the downside potential. It may go to $690,'' he said.
The Federal Reserve is widely seen cutting rates by 25 or 50 basis points from 5.25 percent at Tuesday's meeting to stave of a deeper economic slowdown and help relieve a squeeze in money markets, a move that would erode the dollar's yield appeal.
The euro slipped to $1.3890
''The current momentum has the strength to break the May 2006 high of $730 an ounce, but the move is totally handcuffed to the dollar's slide,'' said Pradeep Unni, an analyst at Vision Commodity Services in Dubai.
Gold would drop if there was a reverse in the dollar's sentiments or if the Fed decided to keep interest rates unchanged, he said.
''For the immediate term, buying is seen but it's prudent to be cautious and trade with strict stops,'' he said.
The benchmark August 2008 gold futures <0JAU:> on the Tokyo Commodity Exchange ended the morning session up 5 yen per gram to 2,643 yen.
REUTERS JT VC0945