(REUTERS) -- Gold prices rose 1 percent on Tuesday as expectations that a Greek rescue deal will be completed drove the dollar down sharply against the euro.
Bullion, which had dropped in early trade on nervousness about Greece, bounced and was on track for its biggest daily gain in two weeks as Greece's government was preparing a list of reforms needed to clinch a new financing package.
Hopes for a bailout plan that would move Athens closer to avoiding a chaotic debt default boosted gold's inflation-hedge appeal.
If the deal falls apart, the ECB is going to be even more aggressive in monetizing things and create credit to insulatethe banking system from a disorganized default, said James Dailey, portfolio manager of the TEAM Asset Strategy Fund.
It's basically a win-win for gold at this point, he said.
Spot gold was up 1 percent at $1,736.30 an ounce by 11:52 a.m. EST (1652 GMT). In early trade, gold had dipped as low as $1,709.29, which was near a two-week low.
U.S. gold futures for April delivery were up $14.20 at $1,739.10.
After a sharp drop in December, gold has risen about 10 percent so far this year, surging last month after the U.S.Federal Reserve said it would keep rates near zero until late 2014 and stood ready to offer extra economic stimulus.
Officials worked on the draft of a text on the 130-billion-euro bailout plan that will be put to Greek political leaders for approval.
If we do get a resolution of the current standoff, then gold will likely benefit, said Anne-Laure Tremblay, an analystat BNP Paribas. Tremblay said failure to reach an agreement would open the door to a default. Such an event or just the market perception that it will occur would likely trigger liquidation across asset classes, including gold, she said.
Optimism about Greece boosted the euro to its highest in about eight weeks.
Also boosting gold sentiment was news that Hong Kong's shipments of gold to mainland China in 2011 more than tripled from a year earlier, confirming China's rapidly growing appetite for bullion.
Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring selected commodities such as gold and oil, given the fragile state of the global economy and brewing geopolitical risks.
Among other metals, silver was up 0.6 percent at $33.82 an ounce, while spot platinum gained 1 percent to$1,638.99 an ounce, and spot palladium edged up 0.1 percent at $703.47 an ounce.