LONDON - Gold hit a one-week high on Wednesday, rebounding from this week's seven-month low, helped by a softer dollar and smouldering trade tensions, though gains were limited by the prospect that rising interest rates will support the greenback.
The dollar fell versus the euro and the yuan, with the Chinese currency continuing its recovery from 11-month lows after the central bank took steps to stem its rapid rise.
A weaker dollar makes dollar-priced gold cheaper for non-U.S. investors.
"Gold has been trending lower for several weeks and this being non-farm payrolls (week) the dollar is likely to remain in range, so people are taking profit on dollar and gold positions," said Fawad Razaqzada, an analyst at FOREX.com.
"I'm still not convinced we've seen the lows so long as gold remains below $1,300. The dollar is on an upwards trajectory. I don't think (looming U.S. interest rate) hikes are fully priced into the dollar or gold."
Spot gold was up 0.2 percent at $1,255.21 an ounce as of 1114 GMT after touching $1,261.10, a one-week high. The yellow metal has gained over $20 from Tuesday's low of $1,237.32 an ounce, its weakest since Dec. 12.
U.S. gold futures for August delivery were trading 0.2 percent higher at $1,256.30 an ounce.
Investors are now looking to minutes of the June U.S. Federal Reserve meeting due on Thursday and the U.S. non-farm payrolls data on Friday for further cues on monetary policy. Valuations remain supportive of the dollar, with markets pricing in two more interest rate hikes for 2018.
World stocks were dragged lower meanwhile by growing anxiety ahead of Washington's end of week deadline to impose tariffs on $34 billion of Chinese imports, and Beijing's vow to retaliate in kind on the same day.
"Since the trade wars have been doing the rounds, if anything we've seen gold come lower. But if it continues to escalate gold could go only one way and that's higher," a Sydney-based trader said.
China is putting pressure on the European Union to issue a strong joint statement against President Donald Trump's trade policies at a summit later this month but is facing resistance, European officials said.
Gold is often regarded as a safe haven during times of political and financial uncertainty.
Silver was 0.1 percent lower at $15.98 an ounce and palladium gained over 0.8 percent to $946.15.
Platinum was flat at $837.20 an ounce. The metal fell on Tuesday to the lowest since December 2008 at $793.
U.S. markets will remain closed on Wednesday for the Independence Day holiday.