By Clara Denina
LONDON (Reuters) - Gold hovered near its lowest in three months on Tuesday as the dollar traded at a 14-month high following a Federal Reserve study that caused investors to reassess prospects for higher U.S. interest rates.
Spot gold was late changed at $1,255.63 an ounce at 1230 GMT. The metal closed down 1 percent on Monday after hitting its lowest since June 10 at $1,251.24.
U.S. gold futures were up $2.00 an ounce to $1,256.30.
"There are all the reasons why gold should be under pressure, you've got significant dollar strength, U.S. interest rate hike expectations, abating geopolitical tensions," Citi analyst David Wilson said.
Gold has risen more than four percent since the beginning of the year, helped by risk aversion during periods of high political tension in Ukraine and the Middle East and uncertainty over the tightening of the U.S. interest rates cycle.
"Gold is being doing better than a lot of people thought because investors think that the interest rate rise in the U.S. will be slower than the Fed thinks, but it will be more bearish for gold if interest rates actually increase sooner rather than later," Wilson said.
The dollar was near July 2013 highs versus a basket of leading currencies, tracking rising U.S. yields after a San Francisco Fed study noted investors are pricing in a lower trajectory for interest rates rises than members of the central bank.
A stronger greenback makes dollar-denominated gold more expensive for holders of foreign currencies, while returns from U.S. bonds are closely watched by the gold market, given that the metal pays no interest.
"Momentum indicators highlight an accelerated pace of decline, and we maintain our expectations for further weakness toward the June low of $1,240," said analysts at ScotiaMocatta.
Investors were also eyeing geopolitical tensions over Ukraine. A ceasefire between Ukraine and pro-Russian rebels last week has weakened safe-haven bids for gold, though each side accused the other of sporadic shelling.
Russia signalled on Monday it might ban Western airlines from flying over its territory as part of an "asymmetrical" response to new European Union sanctions.
Top buyer China returned from a holiday on Tuesday but failed to provide any significant support to prices.
Premiums on the Shanghai Gold Exchange were steady at $4-$5 an ounce, higher than the $2-$3 seen early last week, in a sign that buying has picked up in recent days as prices drop to multi-month lows.
Demand from the world's second-largest gold buyer India remained subdued ahead of the Indian wedding and festival season, which typically falls in October and November, when it's considered auspicious to buy the metal.
Platinum rose 0.3 percent to $1,395.75 an ounce, but still hovering around its lowest since April reached in earlier trade, and palladium was up 0.9 percent to $884.75 an ounce.
Spot silver was flat at $18.09 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by David Evans)
