Gold rises as the US dollar falls; traders focus on Fed rate hike path

Gold prices gained on Monday, aided by a small drop in the US dollar and as investors reduced their bets on the Federal Reserve raising interest rates by 100 basis points this month.

By 0254 GMT, spot gold had risen 0.4% to $1,713.49 per ounce, after plunging to its lowest level in over a year last week. Gold futures in the United States rose 0.5% to $1,711.80.

The dollar fell 0.1% against its peers, pulling away from a near 20-year high reached last week and making greenback-priced bullion less expensive for buyers holding other currencies. [USD/]

"After Friday's University of Michigan inflation component came in weaker, the market scaled back the assumption of a 100-bp rate hike," said Stephen Innes, managing partner at SPI Asset Management.

According to the preliminary July consumer survey conducted by the University of Michigan, people expect inflation to be 2.8% over a five-year horizon, the lowest in a year and down from 3.1% in June.

"Central bank hawkishness has already been priced in, and with gold staying at $1,700 per ounce last week, we may see shorts squeezed a bit as hawks may be unhappy with the Fed just rising rates by 75 basis points next week."

To tackle surging inflation, Fed members hinted on Friday that they will stick to a 75-bp rate increase at their July 26-27 meeting.

At its policy meeting later this week, the European Central Bank is anticipated to hike interest rates by 25 basis points. Although gold is viewed as an inflation hedge, rising interest rates reduce the appeal of bullion, which has no interest bearing value.

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