Gold came off its highs on Tuesday, as the dollar advanced after U.S. Federal Reserve Chair Janet Yellen said the central bank will likely need to raise interest rates at an upcoming meeting with the economy expanding further.
The Federal Reserve chair struck a more hawkish tone than investors had expected, although she did flag considerable uncertainty over economic policy under the new administration.
U.S. President Donald Trump's national security adviser Michael Flynn resigned on Tuesday over revelations that he had discussed U.S. sanctions against Moscow with the Russian
ambassador before Trump took office.
Spot gold traded 0.2 percent higher at $1,227.52 an ounce, while U.S. gold futures settled down 0.03 percent at $1,225.40.
The dollar index reached the highest in more than three weeks following Yellen's prepared remarks before the Senate Banking Committee, while Wall Street rose to a record.
"Yellen is trying to nudge the expectations for a rate hike in March higher. This doesn't mean they will move in March, but the Fed wants to have the option to move," said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange.
Gold is highly sensitive to rising U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.
"There's a nod to further tightening ahead and the risks of waiting too long, and there is a reference to the need at upcoming meetings to evaluate if the economy is evolving in a way that makes further hikes appropriate," said Avery Shenfeld, chief economist for CIBC Capital
Markets in Toronto.
"Note the use of the plural on 'meetings,' so there was no specific allusion to a March hike in the statement, and Yellen also emphasized that any hikes will be 'gradual."'
Ahead of the testimony, Richmond Fed President Jeffrey Lacker said the U.S. central bank will likely have to raise rates faster than financial markets currently expect given any new policies by the Trump administration, while uncertain, will force the central bank's hand.
On the upside for gold, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.49 percent to 840.87 tonnes on Monday.
Gold has rallied nearly 10 percent since touching 10-month lows in December.