* Euro takes a breather after run higher
* Speculators raise COMEX gold net longs
* GRAPHIC-2018 asset returns: (Updates prices; adds analysts comments, NEW YORK dateline)
By Renita D. Young and Jan Harvey
NEW YORK/LONDON, Jan 8 (Reuters) - Gold edged lower on Monday, retreating further from last week's 3-1/2-month high as the U.S. dollar regained some ground against the buoyant euro and traders bet on further U.S. interest rate hikes after Friday's payrolls data. The dollar, which has remained weak after its biggest annual drop since 2003, had helped to lift assets priced in the U.S. currency, with gold last week registering a fourth straight weekly gain for the first time since April.
Spot gold was down 0.1 percent at $1,318.84 an ounce by 1:41 p.m. EST (1841 GMT), while U.S. gold futures for February delivery settled down $1.90, or 0.1 percent, at $1,320.40 per ounce.
"Gold has been following the dollar pretty heavily. We are watching the dollar relative to U.S. deficits," said Rob Haworth, senior investment strategist for U.S. Bank Wealth Management. "Higher deficits, which it looks like tax cuts will do, means a weaker dollar. So there's room for gold."
The dollar rose 0.5 percent against the euro on Monday. After mixed U.S. payrolls data on Friday, traders of U.S. short-term interest rate futures continued to bet that the Federal Reserve will hike U.S. interest rates at least twice in 2018. Gold is highly sensitive to rising U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.
Market participants are awaiting U.S. Consumer Price Index (CPI) data later this week, which are expected to show inflation likely increased 0.2 percent in December after rising 0.1 percent in November. "Investors think the Fed is stuck on a path of three rate hikes right now. Everyone's waiting to see what that inflation is," said Chris Gaffney, president of St. Louis-based EverBank's world markets division.
Longer term, sentiment for gold is bullish, Haworth said.
"You've seen the longs rebuild pretty heavily. So the market's kind of following this trend at this point," he added, referring to the recent commitment of traders report. U.S. stocks were little changed after starting 2018 with strong gains last week.Among other precious metals, silver was down 0.7 percent at $17.11 an ounce, having hit a 1-1/2-month high of $17.29 on Friday.
Platinum was 0.2 percent at $971.40 an ounce after touching a more than 3-1/2-month peak at $973.60 and palladium was 0.9 percent higher at $1,099.60, off last week's record high of $1,105.70.
(Additional reporting by Nallur Sethuraman in Bengaluru; Editing by William Maclean and Richard Chang)
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