By Karen Rodrigues
BENGALURU (Reuters) - Gold prices inched up on Wednesday on a weaker U.S. dollar and lower treasury yields, but expectations of a U.S. rate rise next week kept a lid on gains.
Spot gold was up 0.3 percent at $1,298.98 per ounce at 0635 GMT.
U.S. gold futures for August delivery were 0.1 percent higher at $1,303.10 per ounce.
"Geopolitical tensions are providing (only) limited support to gold prices ... a recovery in the U.S. economy could lead the central bank to have more rate hikes this year, and hence, the upward momentum in gold is not that strong, said Mark To, head of research at Hong Kong's Wing Fung Financial Group.
"$1,300 should be the level around which the gold price is going to move at this moment," To said.
U.S. services sector activity accelerated in May, pointing to robust economic growth in the second quarter and strengthening the case for a rise in U.S. interest rates next week.
Gold, which is a non-interest-paying asset, could see demand take a hit from higher rates.
However, slightly lower U.S. bond yields and a softer greenback, provided support to dollar-denominated gold, OCBC said in a note.
The dollar index, which measures the greenback against a basket of six major currencies, fell 0.2 percent to 93.705.
Treasury yields fell on Tuesday as traders piled back into lower-risk government debt after Italy's new prime minister vowed to enact economic policies that could balloon the nation's already-heavy debt load.
Meanwhile, Mexico on Tuesday imposed tariffs on American products ranging from steel to pork and bourbon in retaliation against import duties on metals imposed by U.S. President Donald Trump last week.
White House economic adviser Larry Kudlow said on Tuesday that Trump is considering holding separate talks with Canada and Mexico, reviving the possibility that the president will seek to replace the North American Free Trade Agreement (NAFTA).
"Investor interest is mixed towards gold in the current environment, with geopolitical tensions attracting reduced flows and limiting the downside risk rather than propelling prices higher," Standard Chartered said in a note on Tuesday.
Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.03 percent to 836.13 tonnes on Tuesday, the lowest since mid-March.
In other precious metals, silver gained 0.6 percent to $16.55 an ounce.
Platinum was up 0.3 percent at $903.50 an ounce and palladium was 0.1 percent higher at $994.50 per ounce.
(Reporting by Karen Rodrigues in Bengaluru; Editing by Subhranshu Sahu and Joseph Radford)
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