Gold eased from a three-week high on Friday as the dollar index rebounded from an earlier three-year low, but was still on track for its biggest weekly gain in nearly two years on the back of weakness in the U.S. currency and inflation concerns.
The dollar hit its lowest since 2014 in overnight trade and is heading for its biggest weekly loss in two years as negative sentiment offset any support the greenback could take from rising Treasury yields.
"We're looking for the dollar to keep weakening. For me that's the key thing to watch for gold," Oxford Economics director of commodity services Daniel Smith said. "Gold tends to do particularly well in that kind of environment."
Signs of rising inflation were also helping drive the metal higher, he said. "If inflation expectations rise faster than nominal rate expectations, then this should add fuel to the fire, particularly in an environment of U.S. dollar weakness."
Spot gold has risen 3.2 percent so far this week, putting it on track for its biggest weekly rise since April 2016. Gold has fared less well in other currencies, rising 1 percent in euro terms and 1.5 percent in sterling.
The dollar hit a three-year low versus a currency basket on Friday, hurt by concerns that Washington might pursue a weak dollar strategy and the perceived erosion of its yield advantage as other countries consider tighter monetary policy.
Data this week showed U.S. producer prices accelerated in January, while initial claims for state unemployment benefits increased in the week ended Feb. 10.
"Rising inflation, coupled with slightly weaker U.S. growth readings and a struggling dollar should continue to provide gold with an element of support," INTL FCStone said in a note.
On the physical side of the market, demand in Asia was muted China, as well as in South Korea, Malaysia and Vietnam. In India, physical gold was sold at a discount for the first time in three weeks as demand slumped due to a jump in local rates. Gold in rupee terms hit a 15-month high of 30,836 rupees on Friday.
Palladium was up 2.16 percent at $1,039.70. The metal has risen 5.9 percent so far this week, its best since October.