Gold prices ticked lower on Tuesday as the dollar held near multi-week highs on reduced expectations of an aggressive U.S. rate cut, although softer share markets capped the metal's losses.
Spot gold was down 0.2% at $1,392.64 per ounce as of 0608 GMT.
U.S. gold futures fell 0.3% to $1,396.30 an ounce.
"Weakness in gold prices is largely due to easing of rate cut expectations and bond yields are recovering. Markets continue to price in a 25 basis point cut but it looks like sentiment is easing and the dollar has rebounded," said Benjamin Lu, an analyst at Phillip Futures.
The dollar index hovered near a three-week peak on Tuesday, making bullion expensive for holders of other currencies. The U.S. Treasury yield curve hit its flattest level in more than a month after investors rolled back expectations for a sharp U.S. rate cut at the end of July.
A week ago, the market forecast an 80.1% chance of a 25-basis-point cut, and a 19.9% chance of a 50-basis-point cut, according to CME Group's FedWatch tool. The chances are now 98% and 2%, respectively.
Adding to the reduced expectations for a larger cut, U.S. consumers in June lifted their inflation expectations for the first time in three months, New York Fed data showed on Monday.
However, the decline in gold prices was limited by weaker financial markets, with Asian stocks falling to their lowest in two-and-a-half weeks on Tuesday.
"We're seeing a lot of Fed policy uncertainty leak into the equation across risk assets in general. Equity markets falling is the most poignant example supporting gold prices," said Stephen Innes, managing partner at Vanguard Markets.
Market participants now await Fed Chairman Jerome Powell's two-day testimony before Congress, which starts on Wednesday for clues about a rate decrease.
Meanwhile, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.15% to 795.80 tonnes on Monday from 796.97 tonnes on Friday.
Hedge funds and money managers raised their bullish stance in COMEX gold in the week to July 2, the U.S. Commodity Futures Trading Commission (CFTC) said on Monday in a report delayed because of the U.S. Independence Day holiday.
On the technical side, spot gold may end its correction around a support at $1,387 and then retest a resistance at $1,421 per ounce, according to Reuters technical analyst Wang Tao.
Among other precious metals, silver gained 0.1% to $15.04 per ounce.
Palladium slipped 0.3% to $1,557.63, and platinum fell 0.3% to $810.95.