Gold fell over 1% on Wednesday as the dollar strengthened and a strong rebound in US manufacturing sector fuelled hopes of a recovery in the coronavirus-hit economy.

Spot gold fell 1.5% to $1,940.57 per ounce by 10:55 am EDT (1455 GMT). US gold futures dropped 1.6% to $1,947.70.

"The dollar index is rallying and the euro currency is selling off because the inflation data was negative in Europe," said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

The dollar was up 0.5%, further moving away from a more-than two-year low, after Euro zone inflation turned unexpectedly negative last month.

Also lifting the dollar, Tuesday's US manufacturing data showed activity accelerated to a near two-year high in August, increasing optimism about an immanent recovery of the US economy.

"As far as the economy is concerned, you are going to get this small bounces in economic data but you are not going to get any significant change in the economy what so ever, not for a long time," Streible, however said.

Bullion prices have surged about 28% this year after the virus upended economies, forcing global central banks to provide massive stimulus.

Meanwhile, US private payrolls increased less than expected in August, pointing to a slowing labor market recovery.

Investor's are now focusing on Thursday's initial US jobless claims report and Friday's non-farm payroll data.

Gold should remain supported as buyers tend to step in on big dips on continued concerns of the pandemic and lower interest rate environment, George Gero, managing director at RBC Wealth Management, said in a note.

On the physical side, India's gold imports jumped, pointing to an improvement in investment demand. .

Elsewhere, silver fell 2.9% to $27.35 per ounce and palladium declined 1.3% to $2,242.15.

Platinum dropped 3.8% to $905.01, having touched a near two-week low earlier.