July 19 (Bloomberg) -- Gold dropped for a second day as the dollar rose against the euro, eroding the appeal of the precious metal as an alternative investment to the U.S. currency and erasing gold's earlier gains.

The dollar strengthened after the interest-rate gap between 10-year U.S. bonds and German bonds widened to the most in five years. Gold has fallen 8 percent from a Dec. 2, 16-year high of $456.89 an ounce as the dollar gained against the euro.

``We expect gold to be led by moves in the euro for the next few weeks,'' said Charles Dowsett, head of precious metals trading at ABN Amro Holding NV in Sydney. ``Trading is very quiet at the moment though and we expect that to continue into August.''

Gold for immediate delivery fell 25 cents, or 0.1 percent, to $420.80 an ounce at 3:47 p.m. Sydney time, compared with the 5 p.m. close in New York yesterday. Earlier, the metal traded as high as $422.15 an ounce. Yesterday, gold fell 0.1 percent.

The dollar traded at $1.2009 against the euro at 3:52 p.m. Sydney time, from $1.2052 late yesterday in New York according to EBS, an electronic currency dealing system. The euro gained 0.1 percent yesterday.

Speculation Federal Reserve Chairman Alan Greenspan in testimony tomorrow will signal further rate increases is also lending support to the dollar.

The Fed has lifted rates nine times in the past 13 months helping push up the dollar almost 13 percent against the euro and 9 percent versus the yen in 2005.

Gold for August delivery rose 20 cents to $421.20 an ounce in after-hours trading on the Comex division of the New York Mercantile Exchange at 3:42 p.m. Sydney time

In India, the world's biggest gold consumer, prices for August delivery fell 3 rupees, or 0.05 percent, to 6,027 per 10 grams, or 18,744 ($430) per ounce, at 10:45 a.m. on the Multi Commodity Exchange of India Ltd. in Mumbai as the rupee remained little changed against the dollar.

To contact the reporter on this story: Matt Chambers in Melbourne at mchambers1@bloomberg.net

Last Updated: July 19, 2005 02:27 EDT