Gold hit a six-week high on Thursday before being pressured by the dollar's bounce on solid U.S. economic data. Traders digested the Federal Reserve's Wednesday statement that showed it was closer to paring its balance sheet.
The U.S. central bank appeared less confident than it had about inflation picking up but said it expected to start winding down its massive holdings of bonds "relatively soon" in a sign of confidence in the U.S. economy.
Spot gold peaked at $1,264.99, its highest since June 15 before trading 0.15 percent lower at $1,258.66 an ounce by 4:35 p.m. New York time.
U.S. gold futures for August delivery settled up 0.84 percent at $1,260, after falling in the prior session before the Fed released its statement.
The dollar turned higher after data showed shipments of key U.S.-made capital goods increased in June for a fifth straight month.
The resulting rise in the greenback pressures dollar-denominated gold since it makes the metal more expensive for investors paying in other currencies.
"The rebound in the dollar is putting a little pressure on gold today," said Phillip Streible, senior commodities broker for RJO Futures in Chicago. "The (Fed's) bond buy back policy will most likely go into
effect, and we should see the long end of the (interest rate) curve start to rise and that could put a little bit of pressure on gold and a touch of a boost on the dollar index."
Fed Funds futures implied on Thursday that traders see a 49 percent chance of the Fed raising interest rates in December, CME Group's FedWatch said.
"Considering that the Fed sees the near-term risk of the economy is neutral, I don't think the market will expect a third rate hike in the foreseeable future or at least in this quarter," Mark To, head of research at Hong Kong's Wing Fung Financial Group, said.
Rising U.S. interest rates increase the opportunity cost of holding non-yielding gold bullion, while boosting the greenback, in which it is priced.
In other precious metals, silver slid 0.05 percent to $16.612 per ounce, after reaching a one-month high at $16.82.
Platinum fell 0.12 percent to $927.90, while palladium gained 1.05 percent to $874.60 an ounce after touching a one-month high at $885.30.
"Palladium still looks quite expensive considering the weaker demand backdrop in the global car market, but we will only get more data in early August," Julius Baer's Menke said.