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Gold prices dropped on Wednesday as easing worries over a potential bigger fallout from the global banking crisis increased appetite for riskier assets and dampened demand for the safe-haven metal.

Spot gold was trading 0.4% lower at $1,966.48 per ounce, as of 0356 GMT, after rising 1% on Tuesday. U.S. gold futures slipped 0.3% to $1,967.50.

"We've seen a natural retracement ... gold is pulling back after a failed 'bid' to break above $1,975," said Matt Simpson, a senior market analyst at City Index.

But some investors "still seem to be holding onto gold 'just in case' there's another skeleton or two lurking in the closet," he said and that gold might catch another bid heading into the European session.

The dollar index steadied, making bullion expensive for overseas buyers. Asian shares rose sharply on Wednesday. [USD/][MKTS/GLOB]

While gold would "ultimately" be supported by the financial system uncertainty, prices could become more volatile and find it hard to pick a "sustainable direction" over the coming weeks if inflation remains elevated and U.S. economic data remains hot, Simpson said.

Data on Tuesday showed U.S. consumer confidence unexpectedly increased in March, while February's U.S. trade deficit in goods widened modestly.

Analysts at Macquarie, in a note, said they expect the U.S. Federal Reserve to "prioritise bringing inflation back to target – with one more rate hike and then no cuts in the early stages of economic contraction – resulting in a period of cyclically weaker gold prices through the second half of 2023."

The opportunity cost of holding non-yielding gold rises when interest rates are increased to bring down inflation.

Markets are pricing in a nearly 43% chance of the Fed raising interest rates by 25 basis points in May, according to the CME FedWatch tool.

Spot silver fell 0.2% to $23.20 per ounce, platinum lost 0.5% at $958.65 and palladium edged down 0.2% to $1,417.09.