Gold prices edged lower on Tuesday following a slight recovery in the dollar, although losses were capped by investor optimism for imminent U.S. rate cuts and lingering concerns about the Middle East crisis.

Spot gold was down 0.4% to $2,507.96 per ounce, as of 0238 GMT. Prices have risen more than 21.5% this year, hitting a record high of $2,531.60 on Aug. 20.

U.S. gold futures fell 0.5% to $2,543.20.

The dollar index edged higher against its rivals, making gold less attractive for other currency holders.

A September U.S. rate cut has been set in stone, but the debate revolving around its size may prompt a wait-and-see mode as investors look forward to upcoming economic data to anchor their views, said IG market strategist Yeap Jun Rong.

Traders see a 70% chance of a 25-basis-point (bp) rate cut and about 30% probability of a bigger 50-bp reduction, according to the CME FedWatch tool.

A low interest rate environment tends to boost non-yielding bullion's appeal.

San Francisco Federal Reserve President Mary Daly said a quarter-percentage point cut in borrowing costs next month was likely.

"We expect the upward trend for gold prices to persist, given its positive performance in past Fed rate-easing cycles, healthy central bank demand and its status as a good hedge against geopolitical and economic risks," Yeap said.

Residents of Lebanese cities felt only partial relief on Monday that one of the biggest exchanges of fire between armed group Hezbollah and the Israeli military the previous day was over, worn down by the relentless tension of 10 months of conflict.

Among other metals, spot silver edged 0.1% higher to $29.93 per ounce, platinum fell 0.5% to $957.55 and palladium rose 0.1% to $959.90.

 

(Reporting by Daksh Grover in Bengaluru; Editing by Rashmi Aich and Subhranshu Sahu)