Gold fell on Thursday, retreating further from the previous session's seven-week high as the dollar and European shares firmed, dulling gold's appeal as an alternative investment. Spot gold was down 0.5 percent to $1,220.06 an ounce by 1034 GMT. The metal rose to a seven-week high of $1,238.20 on Wednesday, before giving up gains on a steadier equity markets. Gold was still on track for a 2.6 percent weekly gain so far, the biggest since mid-Oct, as it benefitted from a pullback in the dollar over the past few sessions. "The key driver behind the recent recovery in prices is the short-covering activity in the futures markets and not really a change in fundamentals," Julius Baer analyst Carsten Menke said. "The fundamental picture is still skewed towards interest rates normalisation in the United States next year and maybe more dollar strength in the medium term and generally a picture of economic recovery, with positive risk appetite that should limit demand for gold as a safe haven." The dollar was up 0.2 percent against a basket of currencies and was expected to firm further ahead of the U.S. Federal Reserve's policy meeting next week, which could give cues on the timing of the central bank's interest rates hikes. A sooner-than-expected rise in interest rates could boost the dollar and hurt non-interest-bearing bullion.

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