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Gold hits 7-week low, then pares losses after Yellen testimony

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Gold fell to a seven-week low on Tuesday then pared losses after Federal Reserve Chair Janet Yellen said the central bank is preparing to consider interest rate hikes on a "meeting-by-meeting basis."

Yellen said the Fed's rate-setting policy committee will likely first remove the word "patient" in describing its approach to rate hikes, then enter a phase in which rate hikes are possible at any meeting.

Spot gold initially fell about 0.8 percent to a seven-week low of $1,190.91 per ounce as the U.S. dollar rose, then eased, down 0.1 percent to $1,199 an ounce. U.S. gold futures for April delivery settled down $3.50 an ounce at $1,197.30.

"The initial negative was the shift in emphasis. Whereas the Fed's last statement showed a fair (sized) bloc worried about raising rates prematurely, Yellen seemed to be laying the groundwork for an increase, at least in the first part of the testimony," said Peter Buchanan, senior economist for CIBC World Markets in Toronto.

Gold bulls apparently liked the assurances from Yellen that rate hikes could still be more than two meetings away, Buchanan said.

The dollar edged lower and bond yields fell after Yellen told the U.S. Senate Banking Committee it would be several months before the Fed expects to raise rates.

Expectations of a rate rise have led to months of dollar strength, lifting it to an 11-year high against a basket of currencies in January.

Read MoreFund managers bet on gold amid Greek uncertainty

Greek shares rose after a list of proposed reforms submitted by Athens was received favorably by the European Commission. The Eurogroup later confirmed it had agreed to submit Greece's proposals for approval by member states.

"There can be little doubt that the immediate risk over this issue has diminished and we could see some short-term weakness in gold as a result," Mitsui precious metals analyst David Jollie said.

A number of major Asian gold markets, most notably China, remained closed for the Lunar New Year break, removing key support for gold, dealers said.

The euro zone raised its gold holdings by 7.437 tons in January, data from the International Monetary Fund showed on Tuesday. Traders attributed the increase to Lithuania joining the currency bloc, while Turkish holdings declined by 14.227 tons.