Gold gained 1% to a more than one-week peak on Thursday, as the dollar tumbled after weaker U.S. economic data on expectations of the Federal Reserve skipping an interest rate hike at its June policy meeting.
U.S. manufacturing contracted for a seventh straight month in May as new orders continued to plummet, while the number of new U.S. jobless claims increased modestly last week.
The dollar slipped, making bullion cheaper for holders of other currencies, while 10-year Treasury yields hit a two-week low, dulling zero-interest-bearing gold's appeal.
"The Fed wouldn't want to put in this much work and then just basically talk rates back down from where they are. I think they want to keep them elevated," said Daniel Pavilonis, senior market strategist, RJO Futures.
Markets now see a roughly 70% chance the Fed will keep rates unchanged next month, up sharply from a 30% probability earlier, after Fed officials including the vice chair-designate pointed towards a rate hike "skip" in June.
Gold, which does not yield any interest of its own, tends to lose its appeal when interest rates rise.
"There's some kind of safe-haven demand supporting gold because of uncertainty regarding the debt ceiling bill," said Commerzbank analyst Carsten Fritsch.
The U.S. Senate was set to take up the bill with just four days left to pass the measure and send it to Democratic President Joe Biden to sign, averting a catastrophic default.