Gold fell to a one-week low on Wednesday ahead of congressional testimony from Federal Reserve Chairman Ben Bernanke, who is expected to offer clues on whether or not US interest rates will rise in August.
A rise in interest rates tends to make the dollar attractive and puts pressure on gold as an alternative investment. Spot gold fell to $625.25/626.05 an ounce from $630.30/631.30 late in New York on Tuesday.
Gold hit a two-month high of $676 an ounce on Monday as worsening conflict between Israel and Hizbollah guerrillas ignited safe-haven buying. But profit-taking and a firming US dollar later erased much of the gains.
"I still feel that the geo-political arena is underpinning it. It's certainly providing support and it has the potential to blow up," said Darren Heathcote, head of trading at Investec Australia in Sydney.
"If it escalates to Syria and Iran, I guess there's a potential for gold to probably push through recent highs again, to break back through $670s if that should happen," he said.
Israel struck Lebanon from the air and made pinpoint attacks across the border on Wednesday as thousands awaited evacuation and the death toll mounted in a conflict that has entered its second week with no end in sight.
US President George W. Bush described Hizbollah as the root cause of the current conflict and said Syria, which supports the Shi'ite Muslim group, was trying to "get back into Lebanon" one year after ending its 29-year military presence. World powers have said Hizbollah must first free two captured soldiers and stop cross-border attacks. Israel has also demanded that Hizbollah disarm in line with UN Security Council resolutions.
"Somewhere around $624 is probably more likely to be support. On the top side....we'll probably find some resistance coming in the late $650s," said Heathcote of Investec Australia. "Anything can happen," he said.
Tokyo gold futures tumbled by their daily limit due to liquidation by Japanese investors as a stronger dollar and recent falls in oil prices undermined sentiment.
Benchmark gold futures on the Tokyo Commodity Exchange fell 60 yen to 2,422 yen per gram but some dealers said gold's fundamentals remained strong.
"This is purely a technical correction as gold has been overbought recently," said Takashi Ogura, a risk management section manager at Kanetsu Asset Management.
"We may see more technical sales, but gold will be well protected as there are plenty of bargain-hunters willing to buy based on its bullish underlying fundamentals."
The dollar held near three-month highs against the euro and the yen ahead of Bernanke's testimony and US consumer price data for June, with the market bubbling with expectations the Fed could lift rates next month for an 18th straight time to 5.5 percent.
The euro was quoted at $1.2495, just off a three-month low of $1.2473 hit on electronic trading platform EBS on Tuesday. The dollar was quoted around 117.25 yen, not far from a three-month peak of 117.59 yen marked on EBS on Tuesday. Platinum fell to $1,205/1,210 an ounce from $1,217/1,223 late in New York. Sister metal palladium also fell to $304/309 an ounce from $308/313 Silver inched up $10.50/10.56 an ounce from $10.48/10.58 late in New York.