LONDON, July 17 (Reuters) – Gold climbed on Monday and was likely to see further gains after the dollar slumped to multi-month lows on the back of data that pointed to weak U.S. inflation and dampened prospects for rate hikes.

“The dollar continues to be on the back foot and yields have dropped back somewhat from their relatively elevated positioning lately,” said analyst Jonathan Butler at Mitsubishi in London.

Spot gold was up 0.6 percent at $1,235.57 per ounce at 1353 GMT, while U.S. gold futures for August delivery rose 0.6 percent to $1,234.70 per ounce.

“If gold remains at $1,230 or goes higher, there’s an elevated risk that some of those short positions might start to be reversed and that would give some further upside to gold,” Butler added.

Recent soft U.S. inflation and domestic demand figures undermined arguments for the U.S. Federal Reserve to raise interest rates, with traders cutting back their bets on the likelihood of an increase in December.

The dollar held at a 10-month low against a basket of currencies, while high-yielding currencies such as the Australian dollar rose to two-year peaks as investors piled into leveraged bets after data dampened expectations of a U.S. rate hike in coming months.

A weaker greenback supports gold since the dollar-priced commodity is less expensive for investors holding other currencies.

“Investor sentiment (for gold) has improved quite dramatically over the past week, especially with the weak data out of the United States last week,” said ANZ analyst Daniel Hynes. “Gold is now primed for another rally.”

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