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Gold prices dipped on Monday as the U.S. dollar held firm, with cautious traders awaiting the Federal Reserve's interest rate hike decision later this week.

Spot gold was down 0.5% at $1,980.42 per ounce by 0531 GMT. U.S. gold futures fell 0.5% to $1,989.10.

The dollar index rose 0.2%, making greenback-priced bullion more expensive for overseas buyers. [USD/]

The Federal Open Market Committee (FOMC) will meet on May 2-3, and investors are largely expecting a 25 basis-point interest rate hike.

"If the Fed comes out unexpectedly hawkish, then it won't bode well for gold. However, I don't think prices will fall below the $1,930 level," said Ilya Spivak, head of global macro at Tastylive.

Data on Friday highlighted that U.S. consumer spending was unchanged in March, while underlying inflation pressures remained strong, which could see the U.S. central bank raising interest rates again next month.

Bullion is known as an inflation hedge, but rising rates tend to dull zero-yielding asset's appeal.

Gold prices rose more than 1% in April as renewed concerns over the U.S. banking turmoil drove investors to the safe-haven asset.

"If we see a meaningful downturn in U.S. economic data that expanded rate cut expectations for the back half of this year, then gold prices could climb above the $2,000 mark," Spivak added.

The European Central Bank is widely expected to raise rates for the seventh straight meeting on May 4.

Top bullion consumer China's manufacturing activity unexpectedly shrank in April, official data showed on Sunday, raising pressure on policymakers seeking to boost an economy struggling for a post-COVID lift-off.

Among other precious metals, spot silver rose 0.1% to $25.06 per ounce while platinum lost 0.7% to $1,066.56.

Palladium inched 0.4% lower to $1,495.06.

Many Asian markets were closed on Monday for the Labour Day holiday.