Gold edged higher during Friday's Asian session but remained near two-week lows as a stronger United States dollar and rising expectations for Federal Reserve interest rate hikes continued to weigh on the precious metal.
By 3:50 pm AEST (5:50 am GMT), spot gold was up 0.3% at US$3,987.62 an ounce, though prices remained on track for their biggest weekly decline in six weeks.
The safe-haven metal came under pressure as escalating conflict between the United States and Iran boosted the U.S. dollar and reignited inflation concerns through higher energy prices.
The United States intensified strikes on multiple targets in Iran and reportedly targeted a tanker bound for Kharg Island, Iran's largest oil export terminal.
Iran responded with missile and drone attacks against U.S. allies in the region and, according to Reuters, instructed its Houthi allies in Yemen to prepare to close the Red Sea shipping route should U.S. forces target Iranian energy infrastructure.
The renewed conflict has pushed oil prices to monthly highs, with Brent and West Texas Intermediate crude both up around 12% for the week, fuelling concerns that higher energy costs could slow progress in reducing inflation.
Persistent inflationary pressures have strengthened expectations that the Federal Reserve could resume raising interest rates, with financial markets increasingly pricing in the possibility of a rate hike as early as September.
Recent U.S. economic data also reinforced the dollar's recovery, with retail sales and weekly jobless claims both coming in stronger than expected, pointing to continued resilience in the world's largest economy.
Investors will now turn their attention to the University of Michigan's preliminary consumer sentiment and inflation expectations survey for fresh clues on the outlook for inflation and Federal Reserve policy, while developments in the Middle East are expected to remain a key driver of precious metals markets.
