Gold prices edged down on Tuesday, pressured by a higher dollar as investors nervous about global economic growth piled into the greenback for safety.
The dollar index hovered near a one-month high hit earlier this week, while the euro edged lower towards a two-year low against the greenback, after China released weaker-than-expected imports data that suggested decreasing domestic demand in the world's second-largest economy.
The lacklustre trade numbers came a day after data showed inflation in China eased further in June, giving room to the central bank to loosen its monetary policy to stimulate growth without stoking upward price pressures.
Spot gold dipped $1.50 to $1,585.15 an ounce by 0620 GMT. U.S. gold futures contract for August delivery edged down 0.2 percent to $1,585.30.
"The market is being a little pessimistic and cautious about the global economy, and investors are choosing the dollar as the top safety haven," said Li Ning, an analyst at Shanghai CIFCO Futures. "The strength in the dollar is in turn putting pressure on gold prices."
The dollar and gold usually display an inverse correlation - when one rises, the other falls. The correlation between the two stood at -0.55 on Tuesday, the strongest inverse correlation between in nearly two months. A reading of -1 shows a perfect inverse correlation.
Technical analysis suggested that spot gold could fall to its Monday low below $1,576 an ounce during the day, said Reuters market analyst Wang Tao.
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The euro zone debt crisis will remain a hurdle to gold prices as it weighs on the euro, Merrill Lynch analysts said in a research note.
Euro zone finance ministers agreed to grant Spain an extra year until 2014 to reach its deficit reduction targets in exchange for further budget savings and set the parameters of an aid package for Madrid's ailing banks.
But they remained far from pinning down details of bank rescues and emergency bond-buying that are of imminent concern to markets.
The Merrill Lynch analysts, however, expect gold prices to get a boost if the U.S. Federal Reserve loosens monetary policy later in the year.
"Loose monetary policies, with a scope for more aggressive balance sheet use in the U.S. and Europe, will keep real rates in most reserve currencies low (or negative) during 2012. We continue to believe that this will allow investor demand to remain strong and prices to reach our $2,000/oz target by the end of the year."
Speculators raised their net long bets in U.S. gold futures and options to the highest level in two months in the week ended July 3, data from the U.S. Commodity Futures Trading Commission showed.