Gold rises to two-week high as dollar stumbles

Gold prices rose on Tuesday to their highest level in nearly two weeks, as the dollar slipped to multi-year lows on bets that U.S. interest rates would stay lower for a longer period after the Federal Reserve's new policy framework.

Spot gold was up 0.7% at $1,983.77 per ounce by 0041 GMT, after hitting its highest since Aug. 19 at $1,984.97 earlier in the session. U.S. gold futures rose 0.6% to $1,990.

"With the greenback expected to remain week, we expect gold to grind higher and revisit the $2,000 an ounce level initially," said Jeffrey Halley, a senior market analyst at OANDA.

The dollar index dropped to a more than two-year low against its rivals, making gold cheaper for holders of other currencies.

The Fed's new monetary policy strategy, which could result in inflation moving slightly higher and interest rates staying lower for longer, has triggered a sell-off in the dollar, driving inflows into safe-haven bullion.

The U.S. central bank's new approach to monetary policy means a low unemployment rate on its own doesn't warrant higher interest rates, Fed Vice Chair Richard Clarida said on Monday.

"Expectations of lower for longer when it comes to U.S. interest rates and continued weakness in the USD index are setting a favourable environment for precious metals, especially gold," ING analyst Warren Patterson said in a note.

Low interest rates reduce the opportunity cost of holding non-yielding bullion, which is also used as a hedge against inflation and currency depreciation.

The United States said on Monday it was establishing a new bilateral economic dialogue with Taiwan, a decision that could worsen relation between Washington and Beijing as China claims Taiwan as its own territory.

Elsewhere, silver jumped 1.3% to $28.59 per ounce, its highest since Aug. 11.

Platinum rose 0.9% to $938.37 and palladium climbed 0.7% to $2,259.57.