* Gold pares gains after Japan quake weighs on markets
* ECB's first rate hike since 2008 stirs inflation worries
* Technical patterns fuel bullishness despite weak volume
* Coming up: US gov't could shut down by midnight Friday (Recasts, updates prices, market activity; adds comments, link to graphic)
By Frank Tang
NEW YORK, April 7 (Reuters) - Gold hit a record high for a third straight session Thursday on inflation worries and expectations that the European Central Bank's first rate hike since the 2008 financial crisis would weaken the dollar.
Bullion came off its all-time high $1,464.80 an ounce after news another strong earthquake hit Japan. The precious metal was up 0.1 percent in late trade after retreating from the session high along with global equities and agricultural commodities.
Trading in the U.S. futures market was half the average, but a bullish technical formation more than offset low volume.
"You're back to a dollar story for the first time in a long time." said Frank McGhee, head precious metals trader of Integrated Brokerage Services. "Gold prices and the dollar both benefit from that rate hike because it increases the differentials between euro zone and the U.S. interest rates."
Rising interest rates generally are negative for gold, but investors bet the dollar would weaken after the ECB rate hike.
Spot gold
The traditional inverse correlation between gold and the dollar appeared to be strengthening to a negative 0.8, as gold hit successive records. A correlation of minus 1 indicates a perfect inverse link, while a correlation of plus 1 indicates that both are moving in perfect tandem. (Graphic: http://link.reuters.com/vus88r)
The ECB raised rates by 25 basis points to 1.25 percent to counter inflation pressure. Gold has risen more than 2 percent this week, benefiting from rallies in crude oil and corn and as Portugal requested a European Union rescue package.
"Of course the ECB will be vigilant in monitoring inflation developments very closely. But it is more inflation expectations that made the ECB concerned, and less the actual increase" in inflation, said Peter Fertig, a consultant at Quantitative Commodity Research.
ECB President Jean-Claude Trichet said the rate hike was not necessarily the start of a series, disappointing some who had expected a more hawkish tone. [ID:nLDE7351QH]
The gold market is also monitoring the U.S. budget crisis. The mood shifted from optimism to pessimism as Democratic and Republican leaders in the U.S. Congress sought a deal to avert a looming U.S. government shutdown. [ID:nN07296632]
Gold has benefited from worries that growing U.S. fiscal imbalance would lead to inflation.
TECHNICAL PATTERN SUPPORTS
On charts, gold notched slim gains amid below-average volume despite a third consecutive record high.
"A neutral day with light volume, after the kind of run that we've seen, is not detrimental to the market or the chart pattern at all," said Scott Meyers, senior analyst at MF Global's Pioneer Futures division.
Gold posted a higher high and higher low, a bullish technical pattern referring to Thursday's high and low above the previous session's, Meyers said.
Among other precious metals, silver
Silver has not shaken its image of an unpredictable metal with high volatility and chronic oversupply, but investors seem set on driving prices beyond the recent 31-year high. [ID:nLDE7361L3]
On fundamentals, industrial demand for silver is expected to rise less than 10 percent this year, after prices more than doubled to 31-year highs since late 2010, the head of metals research and consultant GFMS said on Thursday. [ID:nN06606268]
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