* Dollar falls against basket of major currencies
* Spot gold falls 6.4 pct in July so far
* Investors took $1.2 bln out of precious funds-report (Updates prices, adds comment)
By Marcy Nicholson and Clara Denina
NEW YORK/LONDON, July 31 (Reuters) - Gold reversed earlier losses on Friday as the dollar fell after weaker-than-expected U.S. data, but prices remained on course for their biggest monthly decline in more than two years on expectations the Federal Reserve will soon raise interest rates.
A U.S. government index on employment costs rose less than forecast. ID:nLLAVIEBOZ
"There is no wage inflation in the U.S. and that was the trigger for the sharp move in the euro/dollar rate, which is in turn lending support to the entire commodity sector," Commerzbank (XETRA:CBKG) analyst Daniel Briesemann said.
Spot gold XAU= , lower initially, rose as much as 1.4 percent to a session high of $1,103.13 an ounce, before trading up 0.8 percent at $1,095.80 by 2:34 p.m. EDT (1834 GMT).
U.S. gold for August delivery GCQ5 climbed 0.6 percent to settle at $1,094.90 an ounce.
Investor confidence was shaken last week with when bullion prices tumbled to a 5-1/2-year low of $1,077 on July 24. The metal has lost 6.4 percent so far this month, its steepest decline since June 2013.
The dollar .DXY fell as much as 1.1 percent against a basket of currencies after the data on employment costs. FRX/
Figures had shown a second-quarter improvement in U.S. economic growth on Thursday, which led investors to increase bets the Federal Reserve was on track to raise interest rates, possibly at its next meeting in September. ID:nL1N10A30U ID:nL1N10A24A
The next crucial data release is U.S. nonfarm payroll figures, due on Aug. 7. ECONUS
"If we get a very strong labor market report next week then this gold strength is going to be reversed," Briesemann said.
Waning investment demand and weak physical appetite for gold also pose a further downside risk for prices, said Argonaut Securities analyst Helen Lau.
Investors worldwide pulled $1.2 billion out of precious metals funds in the week ended July 29, a Bank of America Merrill Lynch (NYSE:BAC) Global Research report showed. ID:nL1N10B1DD
"Physical demand has been on the low side with premiums in China and India hardly moving," MKS Group trader Jason Cerisola said in a note.
On the Shanghai Gold Exchange, premiums stood at just over $1 an ounce on the London spot price, traders said. GOL/AS
In other precious metals, spot silver XAG= was up 0.7 percent at $14.75 an ounce.
"Silver might soon be in a shortage as low commodity prices prompt further capital expenditure cuts across primary and secondary mines," said Capital Economics in a note.
Spot platinum XPT= fell 0.4 percent to $982.25 an ounce and palladium XPD= dropped 1.2 percent to $611 an ounce.