Gold prices settled modestly lower on Thursday after an early drop to three-month lows tempted some buyers back to the market, but stayed under pressure amid nonstop U.S. debt negotiations in Washington.
The dollar index hit a one-month peak, European shares rose for a fourth session in a row and U.S. stocks pared early losses on signs that a deal could soon be reached in Washington to avert a damaging debt default.
Spot gold plunged to its lowest since July 10 at $1,251.66 in early trade, but had recovered to $1,274, down 0.1 percent. U.S. gold futures for December delivery settled $3.40 lower at $1,273.20 an ounce.
"Nerves are fraying, and that's being reflected in huge moves in the gold market as sentiment ebbs and flows,'' Societe Generale analyst Robin Bhar said. "The default move is that we will get an agreement, and that will send gold even lower. That's just another reason to lighten up on gold.''
U.S. Senate Majority Leader Harry Reid, a Democrat, said that he and Republican counterpart Mitch McConnell had made "tremendous progress'' in talks on Monday and suggested that a deal could come later on Tuesday.
Gold has fallen 25 percent this year on expectations the Federal Reserve will soon wind down its monetary stimulus program, which has lifted gold by keeping pressure on long-term interest rates and stoking inflation expectations.
The precious metal is now on track for its first annual price fall since 2001.
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