By Clara Denina
LONDON (Reuters) - Gold fell one percent on Wednesday as the dollar hit a three-week high after strong U.S. economic data and comments from Federal Reserve officials bolstered expectations that the central bank could soon raise interest rates.
A Fed policymaker said on Tuesday he would push for an interest rate hike in June or July, and two other Fed officials predicted up to three rate increases this year.
Gold is highly sensitive to rising rates, which increase the opportunity cost of holding it.
Traders will scrutinise the Fed's April meeting minutes, due later on Wednesday, for further clues on the U.S. interest rate outlook.
Spot gold dipped to a session low of $1,266.56 an ounce and was down 0.9 percent at $1,268.56 by 1335 GMT, while U.S. gold futures fell 0.6 percent to $1,269.50.
"There is always some profit taking coming in the market between $1,285 and $1,295, while buying occurs between $1,260 and $1,270," MKS SA head of trading Afshin Nabavi said.
"Only if physical demand comes in, we are likely to see prices above $1,300."
U.S. data on Tuesday showed consumer prices recorded their biggest increase in more than three years in April. Housing starts and industrial production rebounded strongly last month, suggesting the U.S. economy was regaining steam, adding to the case for an early rate hike.
"The dollar is getting some attention today following the CPI data, and that's likely to weigh on gold in the short term," Saxo Bank senior manager Ole Hansen said.
"However, if inflation is really starting to make a return and that dollar strength starts being driven by inflation concerns, there is a positive story for gold in the longer term," Hansen said.
Gold is usually seen as a hedge against inflation.
Bullion has rallied 20 percent this year on speculation that the Fed has slowed down its expected pace of rate increases on concerns about global economic growth and the volatility of stock markets.
In its April policy statement, the Fed indicated it wanted to feel more confidence in the economy's overall health before raising rates again.
Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.56 percent to 855.89 tonnes on Tuesday, the highest since November 2013.
Spot silver slipped 0.6 percent to $17.12 per ounce, spot platinum dropped 0.9 percent to $1,039.60 per ounce and spot palladium fell 0.4 percent to $579.12 an ounce.
(Additional reporting by Koustav Samanta in Bengaluru, editing by William Hardy and Jane Merriman)
