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Gold prices jumped 1% to above the key $1,800 level on Tuesday as the dollar dropped to session lows after the Bank of Japan's surprise policy tweak, while markets also weighed the outlook for the U.S. Federal Reserve's interest rate strategy.

Spot gold was up 0.8% at $1,802.11 per ounce by 0925 GMT. U.S. gold futures rose 0.8% to $1,812.50.

Lifting bullion's appeal among overseas investors, the dollar index eased on the day, as the yen soared after the Bank of Japan decided to review its yield curve control policy.

Spot gold is being given another chance to shine thanks to the U.S. dollar's pullback, said Han Tan, chief market analyst at Exinity, adding, "the next leg down for the dollar should send spot gold onto a new cycle high past $1,824.50."

"Traders and investors should keep the precious metal well bid going into 2023, as markets brace for the prospects of a U.S. recession and the accompanying Fed pivot," he added.

Fed Chair Jerome Powell last week said the central bank will deliver more interest rate hikes next year even as the economy slips towards a possible recession. Other major central banks have also highlighted a similar hawkish stance.

Bullion has shed more than $260 since its March peak as global central banks stepped up efforts to fight soaring inflation.

Although gold is considered an inflation hedge, higher rates increase the opportunity cost of holding the asset.

"The prospects of a higher terminal Fed rate could prevent gold enjoying a runaway rally next year," said Matt Simpson, a senior market analyst at City Index.

Meanwhile, China grappled with surging COVID-19 cases, and the World Bank cut its growth outlook for this year and the next for the top bullion consumer.

Spot silver jumped 2.9% to $23.62 per ounce, platinum gained 1.4% to $993.01, and palladium climbed 1.9% to $1,700.17.