Gold lost its grip on psychological support around $400 an ounce in Europe on Wednesday, having fallen sharply as the dollar rose on comments from Federal Reserve Chairman Alan Greenspan that underpinned expectations for US interest rate moves.
Spot gold was at $397.10/397.60 by 1435 GMT, versus $401.00/401.75 in New York on Tuesday, when it fell nearly $5 an ounce on Greenspan's comments.
Greenspan said on Tuesday in closely scrutinised testimony that the US economy had entered a sustainable expansion that should weather a June slowdown and was under no serious threat from inflation, allowing interest rates to rise at a measured pace.
The Fed raised rates in June to 1.25 percent from 46-year lows of 1.0 percent.
Gold market participants have been alert to Fed comments on monetary tightening as any aggressive rises in interest rates would tend to boost demand for the dollar and tarnish gold's appeal for non-US investors.
Dealers said the market would now need a major move higher by the euro against the dollar to resume the recent rally that saw prices spike to a three-month high at $408.70.
"On the way down today we saw good two-way business, so it was not entirely a one-way street," one dealer said.
"The crucial level for gold is now $395.00 - a break below is likely to trigger further selling with the mid $380s being in reach then," he added.
The dollar rose to two-week highs versus the euro after the Greenspan testimony. The euro was last quoted at $1.2247.
Greenspan speaks again on Wednesday, delivering his semi-annual report on monetary policy before the House Financial Services Committee.
"The yellow metal appears destined to continue to act merely as a proxy for the euro in the near term as it trades mid-way between its key support ($392.25) and resistance ($411.25)," Barclays Capital said in a daily report.
Silver was pulled down by losses in gold to $6.40/6.43 an ounce, compared with $6.57/6.60 in New York.
Platinum fell to $825.50/830.50 from $832.00/837.00 in New York.
Sister metal palladium was at $225.00/230, from $227.00/232.00.
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