Gold reached its highest level in a week on Tuesday as unnerved investors bought bullion after the dollar was hit by U.S. President Donald Trump's comments on currency devaluation by other countries.
The dollar index slid to the lowest in more than seven weeks after Trump said drug companies have outsourced production because of currency devaluation by other countries and his trade adviser said Germany was using a "grossly undervalued" euro to gain competitive advantage.
The U.S. currency was already weaker after Trump sacked top U.S. government lawyer Sally Yates, who refused to defend his curbs on travel from seven Muslim-majority nations.
"Clearly Trump remains the main driver for gold. He has really turned from being a bit of a foe of gold to a friend with the uncertainty of his policies," Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen, said.
"We're not getting any news on fiscal spending and tax cuts. Instead, we're hearing about protectionism and a tough stance on immigration. That's unnerving the market."
A weaker dollar supported bullion, though traders were also eyeing a two-day Federal Reserve meeting starting later in the day, hoping for clues on the outlook for U.S. interest rates.
"The big risk this week ultimately is really going to be what the dollar does, and a lot of that is going to hinge on what does and doesn't come out of tomorrow's FOMC meeting," Credit Suisse analyst Christopher Hine said.
Higher rates could strengthen the U.S. currency, making dollar-denominated gold more expensive for holders of other currencies, potentially dampening demand.
MKS PAMP Group trader Sam Laughlin said that the firing of Sally Yates gave the impetus for gold to break through $1,200. Commerzbank said in a note that gold was also finding support from expectations of higher euro zone inflation.
Data from the European statistics office on Tuesday showed that euro zone inflation jumped by more than expected in January, boosted by a surge in energy prices as economic growth accelerated and unemployment fell to its lowest in more than seven years.
In other precious metals, spot silver rose 2.47 percent to $17.575 an ounce after hitting the highest since Nov. 11 at $17.61. Silver has outperformed gold this month, mainly helped by gains in base metals, which have prompted funds to take long positions since silver also has industrial properties, Saxo Bank's Hansen said.