Gold hits 3-week high as investors assess China currency move

By Clara Denina

LONDON (Reuters) - Gold rose more than one percent on Tuesday as the dollar reversed gains and European stocks fell and investors assessed the impact of China's move to devalue its currency and prop up its economy.

Beijing allowed the yuan to fall to its lowest level in nearly three years after a run of poor economic data, with the central bank describing the move as a "one-off depreciation" of nearly 2 percent.

China's rate decision triggered a sharp but short-lived retreat in gold to a session low of $1,093.25 an ounce.

Spot prices rebounded to a three-week high of $1,119 before trading up 0.4 percent at $1,108.90 an ounce by 1153 GMT.

"Gold is benefiting from fears that this is a new round of 'currency war'," Macquarie analyst Matthew Turner said, adding that the move increases uncertainties and risks about the global economy, which tends to be good for gold.

"Gold's best moment this year came in the first few months when we saw various FX swings, lots of different central banks cutting interest rates or intervening in their monetary policy, so probably there is some element of that which has helped the rally from Monday continue a bit," Turner said.

The metal had gained around one percent on Monday on dollar weakness after comments from Federal Reserve officials raised uncertainty about a September rate hike.

Friday's lower-than-forecast U.S. nonfarm payrolls in July also raised uncertainty whether U.S. rates will rise next month.

U.S. gold for December delivery also rose 0.4 percent to $1,109.00 an ounce.

Analysts, however, do not expect China's yuan devaluation move to bolster gold's value in the medium to long term, as this would have to be followed by a wider round of global devaluation race between currencies.

The euro hit an 11-day high against the dollar on Tuesday, while European shares retreated.

Atlanta Fed President Dennis Lockhart said on Monday that a decision to raise rates should come soon. He said he was "very disposed" to a rate increase at the September policy meeting, but stressed that subsequent increases should be gradual.

Investors have cut their exposure to non-interest-bearing bullion and raised their bets on the dollar on expectations that the Fed would lift rates this year for the first time since 2006. The metal lost nearly 7 percent in July, when it also touched its cheapest since 2010 at $1,077.

Spot platinum rose 0.4 percent to $986.10 an ounce and palladium gained 1.2 percent to $614.70. Silver was up 0.1 percent at $15.22 an ounce.

(Additional reporting by Manolo Serapio Jr in Manila; Editing by William Hardy)