The metal rose for a second day as the single currency hit a 16-month low against the dollar after ratings agency Fitch warned of dire consequences if the European Central Bank refrains from taking more action on Europe's debt crisis.
Bullion has gained around 5 percent in 2012, appearing to halt a strong, positive link with riskier assets. In the previous two months, gold had tended to fall when the dollar strengthened, trading in virtual lockstep with the euro.
However, some analysts said gold's gains could be short-lived because the metal has failed to garner safe-haven buying even as markets fretted over the viability of the euro.
"The strength of the dollar has not been friendly to commodities markets in the past couple of years. As long as the dollar is in an uptrend, I wouldn't be too positive on gold at this point," said Mark Arbeter, chief technical strategist at S&P Capital IQ.
Spot gold was up 0.3 percent at $1,637.51 an ounce by 2:36 p.m. EST (1936 GMT). U.S. February gold futures settled up $8.10 at $1,639.60 an ounce, with volume in line with its 30-day average.
Gold's gain brought prices above their 200-day moving average around $1,635 an ounce. The metal had held the 200 DMA for around three years until late December.
The metal drew support from macro hedge fund buying, said James Steel, chief commodities analyst at HSBC.
Gold's rally to a one-month high of $1,646.90 on Wednesday has given investors more confidence to buy the metal, especially in light of improved demand in India given the rupee's rise against the dollar, and a sharp increase in Chinese imports.
Data showing record gold imports to China late last year has reassured investors that physical offtake is underpinning the market. China, the number-two buyer of the metal, is preparing for the Lunar New Year this month, a key gold-buying period.
FLURRY OF TRADE
The volume of gold futures traded has risen as the metal rallied, suggesting an improved outlook for bullion, analysts said.
According to data from CME Group, which offers the benchmark gold futures contract, volume on Tuesday reached its highest in a month.
read more on this article here