Gold prices rose on Tuesday after hitting a five-week low as the dollar steadied after reaching a 3-week peak following hawkish comments from an influential U.S. Federal Reserve official.
New York Fed President William Dudley said on Monday that labor market tightness should help drive up inflation, reinforcing the message that recent weak data is unlikely to derail plans to keep raising interest rates.
The greenback had a further lift on Tuesday following dovish comments from Bank of England Governor Mark Carney, but later gave back gains to trade little changed versus a basket of major currencies.
"It (another rate hike) is not entirely unlikely. Gold from now to the end of the year could see slight drops, especially if (on top of Fed hikes) the European Central Bank starts tapering its bond buying program," said Natixis analyst Bernard Dahdah.
Spot gold was down 0.01 percent at $1,242.64 per ounce after earlier touching a low of $1,242.61 an ounce, the weakest since May 17.
U.S. gold futures broke even, settling at $1,245.80.
Investors are pricing in around a 50 percent chance that rates will be raised again by the year-end, according to CME FedWatch. A strong dollar makes dollar-priced gold costlier for non-U.S. investors.
"The market attributes considerable weight to Dudley's words, as he represents the majority opinion of the Federal Open Markets Committee. Other Fed members who are generally regarded to be hawkish will be speaking today, which could put renewed pressure on the gold price," said Commerzbank in a note.
Late Monday, Chicago Fed President Charles Evans said it may be worthwhile for the U.S. central bank to wait until year-end to decide on rates, but investors focused on Dudley's comments to bet the dollar up and gold down.
"Mixed U.S dollar trade provided some respite for gold during Asian trade on Tuesday, however, not to the extent we expected we would see," MKS PAMP trader Sam Laughlin said in a note.
"The next key level of support sits around $1,240, with a broad extension to the 200 day moving average around $1,237."
Silver increased 0.12 percent to $16.47. In the previous session, it touched $16.44, its weakest since May 18.