By Veronica Brown and Vijaykumar Vedala
LONDON/BENGALURU (Reuters) - Gold rose slightly on Wednesday, supported by an inauspicious start to June for stock markets and the dollar, as the market tries to assess how close the United States is to raising interest rates.
World shares started June on the back foot, while the dollar faltered against the yen and the euro after soft data in the world's largest economy prompted investors to reconsider whether the U.S. Federal Reserve will raise interest rates in the coming months.
The yen gained further after Japan's Prime Minister Shinzo Abe announced a delay in a planned sales tax hike and flagged risks to the global economy.
Data on Tuesday showed U.S. consumer confidence dipped while business activity in the U.S. Midwest also underwhelmed. That did not bode well for the Institute of Supply Management's (ISM) manufacturing survey later on Wednesday, with a weak reading seen reducing chances of a June rate hike.
Spot gold was up 0.3 percent at $1,218.80 an ounce by 1156 GMT. The precious metal gained 0.8 percent on Tuesday, its biggest single-day percentage gain since May 13 after some 10 days of declines.
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"The market is on hold right now ahead of the ISM data. Disappointing data could pull back expectations for near term rate hikes and weigh a bit on the dollar," Danske Bank senior analyst Jens Pedersen said.
"It's all about managing the next hike," he added.
Bullion has climbed nearly 15 percent so far this year, but buckled after minutes from the Federal Reserve's April meeting boosted expectations for monetary tightening.
Gold shed around 6 percent in May, its biggest decline in six months.
While prices gained traction in the past couple of days, analysts said further losses were possible, exposing psychological support at $1,200.
"Gold is likely to continue its outperformance relative to silver for the time being but we still think it's too early to "buy the dip" outright, particularly ahead of Friday's deluge of U.S. data (non-farm payrolls, earnings, unemployment, services PMI, factory orders)," ICBC Standard Bank said in a note.
"...Although we have seen some signs of improvement in physical demand over the past few days, it has not yet been deep or broad enough to convince us that the correction is over."
Higher U.S. rates would raise the opportunity cost of holding gold, which does not earn interest. It would also lift the dollar, making gold more expensive for buyers in other currencies.
Among other precious metals, spot silver was unchanged at $15.99 per ounce. Spot platinum was also unchanged at $977.80, while palladium fell 0.4 percent to $545.33.
(Reporting by Veronica Brown; Editing by Susan Thomas and Mark Potter)