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(Corrects gold settlement price to $4,151.90, not $4,1561.90, in paragraph 2)
By Sukanya Mitra
July 22 (Reuters) - Gold hit a two-week high on Wednesday, buoyed by a softer dollar and technical buying, as markets weighed lingering Middle East tensions and awaited fresh interest rate cues from the U.S. Federal Reserve.
Spot gold gained 1.7% to $4,145.24 per ounce by 1:35 p.m EDT (1641 GMT), having hit its highest level since July 7 at $4,165.87 per ounce earlier in the day. U.S. gold futures for August delivery settled 1.9% higher at $4,151.90.
"Gold exploded higher, punching above $4,140 as a weaker dollar and dip buyers injected fresh inspiration into bulls," said Lukman Otunuga, senior research analyst at FXTM.
"The underlying bearish fundamentals may cap upside gains — especially with oil prices up over 3% this morning," he added.
The U.S. dollar index softened on Wednesday, making greenback-priced bullion more affordable for buyers overseas.
U.S. Secretary of State Marco Rubio said Washington was willing to negotiate an end to the Iran crisis but Tehran was not serious about talks.
The widening conflict led four tankers loaded with Saudi crude for Asia to reverse course in the Red Sea on Wednesday after threats from Yemen's Iran-aligned Houthis, who control the coast on the southern route out.
Oil prices rose to a near six-week high on the news.
Elevated oil prices due to Gulf supply disruptions have been weighing on gold prices as they raised expectations of higher-for-longer interest rates, which tend to diminish the appeal of non-yielding gold.
Meanwhile, the Fed is likely to keep its key interest rate steady for the rest of 2026, data from a Reuters Poll showed, with markets pricing in two rate hikes by the end of March next year.
Traders anticipate about a 76% chance of an interest rate hike in September, according to the CME FedWatch Tool.
Investors are now eyeing the FOMC interest-rate decision meeting next week for further clues on the Fed's monetary stance.
Elsewhere, spot silver rose 2% to $59.98 per ounce, platinum gained 0.7% to $1,640.63, and palladium inched up 1.4% to $1,299.47.
(Reporting by Sukanya Mitra in Bengaluru; Editing by Jonathan Ananda, Nia Williams and Joyjeet Das)
