Gold bounced back on Tuesday as the dollar remained under pressure from expectations the Federal Reserve would refrain from raising rates again next week.
But violence in the Middle East and news that North and South Korean troops along their heavily fortified border exchanged gunfire for the first time in about a year failed to give gold much of a lift, dealers said.
Spot gold hit a high of $637.50 an ounce but then retreated to $634.00/635.00 an ounce, hardly changed from $634.70/635.45 late in New York on Monday, when it fell slightly due to end-of-the-month book squaring.
Dealers said gold was likely to face stiff resistance at $650 even though some investors could be tempted to ditch the dollar and buy gold following comments on the rate outlook by Fed officials. Gold's downside target was pegged around $620.
"On the whole, things are a little bit difficult. The market hasn't got enough behind it to drive it forcefully one way or the other at the moment," said Darren Heathcote, head of trading at Investec Australia in Sydney. "At the moment, markets are looking at the Fed and waiting for further news, either escalations or peace in the Middle East," he said.
Israeli troops fought fierce battles with Hizbollah guerrillas in southern Lebanon on Tuesday, as the Jewish state gave the green light to widen a ground offensive and push deep into Lebanese territory. At least 598 people have been killed in Lebanon, although the health minister puts the toll at 750, including bodies still buried under rubble.
Fifty-one Israelis have also been killed in the violence ignited by Hizbollah's capture of two Israeli soldiers in a cross-border operation on July 12. In the currency market, the dollar was in sight of a three-week low against the yen as expectations run high the Federal Reserve will take a break next week from its two-year campaign of raising interest rates.
The dollar was slightly higher at 114.75 yen, having fallen as low as 114.19 yen on Monday on electronic trading platform EBS, the lowest since July 12. The euro edged down to $1.2750 from $1.2765 in late US trade. Benchmark gold futures on the Tokyo Commodity Exchange fell eight yen per gram to 2,364 yen, tracking losses in New York's COMEX market.
"Technically, we are still stuck in a narrow range. The Japanese were buying gold in the spot market this morning but there was no follow through," said a dealer in Hong Kong. "In general, there's not much going on the physical side. We might see some demand if gold falls back to around $600 an ounce," he said. Platinum eased to $1,227/1,232 an ounce from $1,228/1,234 late in New York. Sister metal palladium rose to $311/316 an ounce from $310/315. Silver inched up to $11.35/11.42 an ounce from $11.29/11.39 late in New York.
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