By Renita D. Young and Peter Hobson
NEW YORK/LONDON - Gold rose to a two-and-a-half-week high on Friday after U.S. President Donald Trump warned he might ultimately end a 2015 nuclear agreement with Iran and after weak U.S. inflation data undermined the case for interest rate rises.
Underlying inflation in the United States remained muted in September despite a surge in gasoline prices after hurricanes disrupted production in the Gulf.
Markets were pricing in an 82 percent chance of a December rate hike, down from 87 percent before the data were released, according to CME Group's FedWatch tool.
Gold is sensitive to rising rates because they push bond yields higher and tend to boost the dollar, which reduces the attractiveness of non-yielding bullion while making it more expensive for holders of other currencies.
Spot gold rose for a sixth straight session on Friday, and was up 0.8 percent at $1,303.5 an ounce by 3:53 p.m. EDT (1953 GMT), after hitting $1,302.40, the highest since Sept. 26. It was set for a weekly gain of 2 percent.
U.S. gold futures for December delivery settled up $8.10, or 0.6 percent, at $1,304.60 per ounce, also touching the highest level in more than two weeks.
The price gains propelled gold through Fibonacci resistance and the 50-day moving average at around $1,298.
"Once gold crossed past the $1,300 key psychological level, we saw aggressive buying," said Phillip Streible, senior commodities strategist at RJO Futures in Chicago.
Trump struck a blow against the Iran agreement on Friday, choosing not to certify that Tehran is complying with the deal and warning he might ultimately terminate it.
A more confrontational stance on Iran would add to worries over North Korea and political chaos in Washington and increase demand for gold as a safe haven, Saxo Bank analyst Ole Hansen said.
The U.S. dollar index <.DXY> turned slightly higher after his announcement, but was almost flat at 3:44 p.m. EDT.
"It was a little knee jerk reaction," Bill O'Neill, partner at Logic Advisors in Upper Saddle River, New Jersey, said of the dollar's rise. "The announcement was pretty much as expected."
A higher dollar makes commodities priced in the greenback more expensive for holders of other currencies.
Elsewhere, European Central Bank chief Mario Draghi on Thursday defended a pledge to keep interest rates at rock bottom and the Bank of Japan's Haruhiko Kuroda stressed resolve to maintain ultra-loose monetary policy.
Silve was up 1.09 percent at $17.36 an ounce after hitting a three-week high of $17.39.
Platinum was up 1.13 percent at $945.50 an ounce, hitting a three-week high of $946.10 and palladium was 1.8 percent higher at $990.50 after hitting a 5-1/2-week high of $996.90.
(Additional reporting by Apeksha Nair in Bengaluru; editing by Adrian Croft and Susan Thomas)