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 Gold prices rose in holiday-thinned trade on Tuesday as the U.S. dollar and bond yields weakened on growing prospects for interest rate cuts by the Federal Reserve as early as March next year.

Spot gold was up 0.5% at $2,063.78 per ounce, as of 0401 GMT, after hitting a more than two-week high of $2,070.39 in the previous session. U.S. gold futures rose 0.3% to $2,074.90 per ounce.

"Gold prices have resumed their upside into the new week, after receiving the go-ahead from softer-than-expected U.S. personal consumption expenditure data last Friday, which validates the dovish rate expectations priced by markets," IG market strategist Yeap Jun Rong said.

"As long as the trend in economic data remains, gold prices may eye another break of the upper consolidation range at the $2,080 level ahead," Yeap added.

Data on Friday showed that U.S. prices fell in November for the first time in more than 3-1/2 years, pushing the annual increase in inflation further below 3%.

Lower interest rates decrease the opportunity cost of holding non-yielding bullion.

Traders are now pricing-in an 89% chance of a rate cut by the U.S. central bank in March, according to the CME FedWatch tool.

The dollar index fell 0.1%, making gold more attractive for other currency holders, while the benchmark U.S. 10-year bond yield edged lower to 3.8838%.

Meanwhile, the U.S. military carried out retaliatory precision air strikes in Iraq after a one-way drone attack earlier on Monday by Iran-aligned militants left three U.S. troops wounded.

Gold is seen as a safe-haven asset during times of geo-political uncertainty.

Markets in Australia, New Zealand, Hong Kong and the Euro Zone are closed on Tuesday for the Boxing Day public holiday.

Spot silver rose 0.8% to $24.37 per ounce, while platinum gained 0.2% to $972.85, and palladium climbed 0.6% to $1,209.74.