May 19 (Bloomberg) -- Gold prices fell in New York for the first time in three days as an increase in the value of the dollar erodes the appeal of precious metals as an alternative to U.S. assets.

The dollar rose from its lowest in almost a week against the euro on speculation the Federal Reserve will keep raising interest rates, while the European Central Bank makes no change. Gold has dropped 4 percent this year as the dollar climbed 6.8 percent against the euro.

The gap in interest rates between the U.S. and Europe will draw investors to buy U.S. assets, said Leonard Kaplan, president of Prospector Asset Management, a money-management company in Evanston, Illinois. ``Gold is obviously going lower because the dollar is rising. Sell gold on every rally.''

Gold futures for June delivery dropped $1.10, or 0.3 percent, to $420.80 an ounce on the Comex division of the New York Mercantile Exchange. A futures contract is an obligation to sell or buy a commodity at a set price by a specific date.

Fed policy makers two weeks ago increased the interest-rate target for overnight loans between banks a quarter-point to 3 percent, the eighth increase since June, and maintained a pledge to keep raising rates at a ``measured'' pace. The European Central Bank has left its main rate at 2 percent since June 2003.

Gold has moved almost in lockstep with the euro's performance against the dollar in the past three months at a correlation coefficient of 0.91. The maximum reading is 1. The coefficient measures the degree in which the two variables move in unison.

Equities Rally

Gains in U.S. equity markets also contributed to gold's decline, traders said. Yesterday, benchmark indexes capped their biggest three-day rallies in six months. The Standard & Poor's 500 Index added 1 percent, while the Dow Jones Industrial Average Index and Nasdaq Composite Index each rose 1.3 percent.

``The stock market rally is taking interest out of the gold market,'' said Marty McNeill, a trader and analyst at R.F. Lafferty & Co. in New York.

Gold may rise in the next few weeks as traders speculate the dollar has peaked, and crude oil won't decline further.

``Gold's had a sharp move down,'' McNeill said. ``The negatives for gold -- lower oil and a stronger dollar -- have been realized.''

Investors sometimes buy gold as energy costs rise to hedge against inflation. Oil traded near a three-month low.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net

Last Updated: May 19, 2005 14:08 EDT