Gold hits nine-month trough as dollar strength takes a toll

Gold fell to a fresh nine-month low on Tuesday, pressured by the dollar`s continuing rally, as investors awaited U.S. inflation data that could prompt the Federal Reserve to solidify its aggressive stance on monetary policy.

Spot gold fell 0.3% to $1,728.58 per ounce by 0457 GMT, after hitting its lowest since Sept. 30 of $1,722.36 earlier in the session.

U.S. gold futures eased 0.3% to $1,727.20.

"Gold looks like it is trading in direct correlation with EUR/USD in Asia," and if EUR/USD falls through 1.0000 in Asia, gold could drop toward $1,700, OANDA senior analyst Jeffrey Halley said.

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"Gold seems to have found a few friends near $1,730 over the last couple of days, without ever seriously looking like it would reverse its recent selloff."

The dollar climbed to a fresh 20-year peak against a basket of currencies, making greenback-priced gold more expensive for buyers holding other currencies.

U.S. consumer price index data, a key measure of inflation, is due Wednesday, and is expected to show prices rose 8.8% in June from a year earlier.

Recent inflation data has not been encouraging, Atlanta Fed president Raphael Bostic said on Monday, saying the lack of month-to-month improvement in the pace of price increases warrants another 0.75 percentage point increase in the federal funds rate when policymakers meet later this month.

Higher interest rates and bond yields increase the opportunity cost of holding non-yielding bullion.

Spot gold may test a support at $1,721 per ounce, a break below which could open the way towards $1,700-$1,711, Reuters` technical analyst Wang Tao said.

Spot silver fell 0.4% to $19.01 per ounce, platinum dipped 0.8% to $862.66, and palladium dropped 2.3% to $2,113.18.