Gold Increases As Dollar Decreases; Traders Concentrate On Fed Rate-Raise Path

The price of gold increased on Monday, aided by a minor drop in the U.S. dollar and as investors reduced their bets on a 100-basis-point Federal Reserve rate hike this month.

By 02:54 GMT, spot gold had increased 0.4% to $1,713.49 per ounce, after plunging to its lowest level in over a year the previous week. Gold futures in the U.S. rose 0.5% to $1,711.80.

The dollar fell 0.1% against its rivals, slipping farther from a near 20-year high reached last week and rendering bullion bought in dollars cheaper for buyers holding other currencies. [USD/]

"The market retreated from the notion of a 100-bp rate hike after the University of Michigan inflation component came in less than expected on Friday," said Stephen Innes, managing partner at SPI Asset Management.

The preliminary July poll of consumers conducted by the University of Michigan revealed that consumers expect inflation to average 2.8% over the next five years, the lowest reading in a year and a decrease from 3.0% in June.

"Central bank hawkishness has already been priced into the market, and with gold staying steady at $1,700 per ounce last week, we may see shorts get squeezed a bit as hawks are likely to be disappointed by the Fed's decision to raise rates by only 75 basis points next week."

Fed officials hinted on Friday that they will maintain a 75-bp rate hike at their July 26-27 meeting to battle inflationary pressures.

At its policy meeting later this week, the European Central Bank is likely to hike interest rates by 25 basis points. Although gold is viewed as a hedge against inflation, rising interest rates diminish the allure of metal, which pays no interest.