NEW YORK/LONDON: Gold fell more than one percent on Wednesday as the dollar hit a new three-week high following minutes of the U.S. Federal Reserve`s last policy meeting that bolstered expectations that the central bank could soon raise interest rates.
The U.S. central bank will likely raise interest rates next month if economic data points to stronger second-quarter growth as well as firming inflation and employment, according to minutes from the U.S. central bank`s April policy meeting.
The indications followed a Fed policymaker`s comment on Tuesday he would push for an interest rate hike in June or July, and two other Fed officials, who predicted up to three rate increases this year.
Gold is highly sensitive to rising interest rates, which increase the opportunity cost of holding it.
Spot gold dipped to a session low of $1,262.45 an ounce after the news and was down 1.28 percent at $1,263.2 by 2:29 p.m. EDT (1829 GMT), while U.S. gold futures settled down 0.2 percent at $1,274.4.
U.S. data on Tuesday showed consumer prices recorded their biggest increase in more than three years in April. Housing starts and industrial production rebounded strongly last month, suggesting the U.S. economy was regaining steam, adding to the case for an early rate hike.
"The dollar is getting some attention today following the CPI data, and that`s likely to weigh on gold in the short term," Saxo Bank senior manager Ole Hansen said.
"However, if inflation is really starting to make a return and that dollar strength starts being driven by inflation concerns, there is a positive story for gold in the longer term," Hansen said.
Gold is usually seen as a hedge against inflation.
Bullion has rallied 20 percent this year on speculation that the Fed has slowed its expected pace of rate increases on concerns about global economic growth and the volatility of stock markets.
The rally has prompted prominent investors, including billionaire financier George Soros, to buy into gold through exchange-traded funds in the first quarter.
Holdings in SPDR Gold Trust , the world`s largest gold-backed exchange-traded fund, rose 0.56 percent to 855.89 tonnes on Tuesday, the highest since November 2013.
Spot silver slipped 1.52 percent to $16.96 per ounce, spot platinum dropped 1.56 percent to $1,032.6 per ounce and spot palladium fell 1.03 percent to $574 an ounce.