* Platinum ETF launch effect offset by stronger dollar
* SPDR Gold holdings inch down 0.08 pct
* CDS risk for euro, commodities highlighted
(recasts, changes dateline, byline, previous TOKYO)
By Veronica Brown
LONDON, Jan 20 (Reuters) - Platinum prices relinquished an earlier spike to 17-month highs on Wednesday at $1,654 per ounce, with positive sentiment from the recent launch of new exchange-traded funds overrun by a resurgent dollar.
Gold prices also gave way to unfavourable currency fundamentals, dropping some 0.8 percent to fall below $1,130.
The U.S. currency hit five-month highs against the euro <EUR=> with the single currency's decisive break below a key technical support level prompting widespread selling.
Spot platinum <XPT=> rose as high as $1,629, a level last seen in August 2008, but the dollar's strength pulled prices back to $1,632.50 by 1258 GMT, down from $1,643 quoted late in New York on Tuesday.
"Platinum has done well but for now it's tracking back in line with gold and the retreat in base metals," said Tom Kendall, analyst at Mitsubishi in London.
A U.S. subsidiary of London's ETF Securities launched platinum and palladium exchange-traded funds earlier this month, and both metals had climbed since then.
The metal, which like palladium is also valued for its industrial use in autocatalysts, is expected by some market participants to head higher.
"We're a little bit cautious on how quickly underlying demand will turn around particularly from the auto sector here in Europe, but over the longer term the fundamentals are looking pretty good," Kendall said.
Bank of America Merrill Lynch on Tuesday raised its 2010 platinum forecast to $1,750 an ounce from $1,440 an ounce, on the launch of the new funds and an improving auto sector. [
]But Bank of Nova Scotia's Simon Weeks was not as bullish as most. "I think the economic recovery is not as strong as people want to believe," he added.
Platinum's sister metal palladium <XPD=> retreated to $455.50, from $464.50 late in New York on Tuesday.
HEADWINDS
Gold prices reflected currency market sentiment, with dollar strength sapping the metal's appeal to non-U.S. investors.
Spot gold <XAU=> stood at $1,129.55 per ounce, down 0.8 percent from $1,137.95 quoted late in New York on Tuesday. U.S. gold futures for February delivery <GCG0> were at $1,129.30, down 0.9 percent from the settlement in New York.
Spot silver followed gold's lead, falling 1 percent to $18.53 per ounce <XAG=>.
External headwinds were gathering, with Chinese banking authorities instructing some major banks to stop new lending for the rest of January after loan growth surged in the first few weeks of the year. [
]With analysts expecting further tightening moves from China, the gold market was seeing an indirect impact, as any signal of higher real interest rates impacts the non-interest bearing precious metal.
Barclays Capital said in a note to clients that investors were beginning to reassess the bullish enthusiasm that had characterised the New Year, with risks lurking for commodity markets.
It noted recent price action in the credit default swap (CDS) market that suggested investors are growing more cautious on Europe as a whole and not just on Greece's debt problems.
"While the immediate implications are for further euro weakness (and dollar strength), continued widening in core European CDS spreads is likely to have bearish reverberations across financial and commodity markets," Barclays said.
On the investment front, the world's largest gold-backed exchange-traded fund, SPDR Gold Trust <GLD>, said its holdings stood at 1,111.922 tonnes as of Jan. 19, down 0.08 percent from the previous business day. [
] (Additional reporting by Miho Yoshikawa in Tokyo; editing by Sue Thomas)