LONDON: Gold clawed higher on Thursday after President Donald Trump agreed a deal with opposition Democrats to temporarily extend the U.S. debt limit, helping to weaken the dollar.
Continuing tensions with North Korea over its nuclear tests provided further support for safe-haven gold ahead of a meeting of the European Central Bank.
Spot gold was up 0.5 percent at $1,339.79 per ounce at 0955 GMT, after easing 0.3 percent in the previous session.
U.S. gold futures for December delivery rose 0.4 percent to $1,344.60.
On Wednesday, Trump forged a surprising deal to provide government funding until Dec. 15, averting a crisis over the debt ceiling.
Gold initially fell in response to the deal, but got support on Thursday as investors digested the implications of the deal.
"We see that strangely playing out in the dollar," said Jonathan Butler, commodities analyst at Mitsubishi in London.
Fears of a debt default had boosted the dollar and treasury yields through safe haven buying, but once that concern was lifted, those flows reversed, Butler said.
"Now that we've seen a kicking into long grass of the debt ceiling issue, we've actually seen the dollar being sold off, and that's given some support to gold today." The dollar index fell as low as 91.856, the weakest since Aug. 29.
Investors will also keenly watch the outcome of an ECB policy meeting on Thursday, when President Mario Draghi is expected to start laying the groundwork to withdraw monetary stimulus.
"The major event for today is the ECB meeting for traders, and if the ECB delivers any unexpected message during the conference that will spook the market and the gold price could benefit," said Naeem Aslam, chief market analyst, Think Markets.
"The odds of geopolitical tensions escalating further are very high. If North Korea does another missile test, it will trigger risk-off trade and the yellow metal could benefit," Aslam added.
China said on Thursday it agreed the United Nations should take more action against North Korea after its latest nuclear test, while pushing for more dialogue to resolve the crisis on the Korean peninsula.
The market will start to shift focus to the next Federal Open Market Committee meeting (FOMC), due to begin on Sept. 19.
"I expect some downward pressure on gold starting next week and a rebound in the dollar short term" said Samson Li, an analyst with Thomson Reuters-owned metals consultancy GFMS.
Higher interest rates tend to boost the dollar and push up bond yields, putting pressure on gold prices by increasing the opportunity cost of holding non-yielding bullion.
Among other metals, silver rose 0.3 percent to $17.88 an ounce, while platinum dipped 0.2 percent to $1,001.45 an ounce.
Palladium added 0.3 percent to $942.25 an ounce.