The dollar index, which measures its strength against a group of six major currencies, hit a 2-week high on Tuesday. "Gold has become a victim of a stronger greenback in the short term. A weaker euro and concerns around growth in Europe have given a leg up to the dollar, pushing gold prices down below key level of $1,280," said Kyle Rodda, market analyst with IG Markets.
"We haven't seen much of data coming out of US recently due to the government shutdown. If we see more weaker data that could cause bond yields to fall and support gold. Also, technically, we need to see gold push above the challenge of $1,300 level." "It seems that several factors boosting gold earlier in January now seem to be having no effect, namely, the far more dovish Fed statements and clearer signs of slowing global macro growth," INTL FCstone analyst said in a note.
"Instead, it seems that gold is being undermined by a slightly stronger dollar along with a modest uptick in US 10-year yields." Fed officials have left little doubt that they want to stop raising interest rates, at least for a while. Higher interest rates tend to reduce appetite for non-yielding gold. Spot gold may fall to $1,268, as it has broken a support at $1,279 per ounce, according to Reuters technical analyst Wang Tao.