TOKYO (Reuters) - Gold rose to test $985 per ounce again on Wednesday, as a weakening U.S. dollar prompted investors to buy bullion as a hedge against the deterioration of dollar-denominated portfolios.
Hopes that the global economy may be on the road to recovery also buoyed demand for bullion. Gold is used in electric equipment and other products, and inflation can boost demand for the precious metal.
"The U.S. dollar is weak, with the British pound and the euro getting stronger, so investor buying continued," said Dick Poon, manager of precious metals at Heraeus in Hong Kong.
"Right now customers are still bullish on the market, with many looking to gold prices jumping over an all-time high of $1,030 (by the end of this year)," he said.
But there is general caution that gold has risen too fast, keeping the market's topside capped for now, traders said.
Spot gold climbed 0.4 percent to $984.45 per ounce at 9:11 p.m. EDT from New York's notional close of $980.85 on Tuesday, when it rose as high as $986.40.
It touched a three-month high of $988.50 on Monday, up almost 10 percent from the level a month earlier.
U.S. gold futures for August delivery edged up 0.2 percent to $986.10 per ounce from Tuesday's $984.40 settlement on the COMEX division of the New York Mercantile Exchange.
In the currency markets, the euro stayed near a 5-month high of $1.4332 marked on Tuesday ahead of the European Central Bank's monetary policy decision later in the week.
The British pound traded at $1.6580 after hitting a seven-month high of $1.6595 on Tuesday.
Bullion was also supported by the U.S. government's extra borrowing making the U.S. Treasury market vulnerable to falls, traders said, with the benchmark 10-year note yield reaching a six-month peak of 3.75 percent last week.
A drop in the appeal of U.S. Treasuries often prompts funds to buy gold, another safe-haven asset.
"Gold will keep shining for a while, taking advantage of jitters in the U.S. bond market as well as the weakness in the U.S. dollar," said Yuki Sonoda, an advisor to Daiichi Commodities Co in Tokyo.
"The time for it to test the $1,000 level is well in sight," he said, referring to a level last reached in late February.
The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings stayed unchanged on June 2 from a record 1,134.03 metric tons marked the previous day.
