May 19 (Bloomberg) -- Gold rose to a one-week high as the dollar traded near the lowest in almost a week against the euro in Europe after traders scaled back predictions of how much the Federal Reserve will increase interest rates.

A three-week rally in the dollar ended after a U.S. government report yesterday showed a measure of inflation was unchanged in April, leading to a reassessment of how much more the Fed will raise interest rates.

U.S. consumer prices rose 0.5 percent, from 0.6 percent in March, the Labor Department said yesterday. Excluding energy and food, prices held steady. Economists had expected a 0.2 percent increase based on the median estimate in a Bloomberg survey.

``The key driver of gold prices for the last three or four years has been the U.S. dollar,'' said Greg Foulis, who helps manage $400 million at Deutsche Bank AG's Scudder Gold & Precious Metals Fund in Sydney. Inflation is the main driver of Fed monetary policy ``at this stage of the cycle,'' he said in an interview.

Gold for immediate delivery rose as much as $1.50, or 0.4 percent, to $423.35 an ounce, the highest since May 12, from $421.75 at 5 p.m. yesterday in New York. The precious metal traded at $422.67 at 4:10 p.m. Sydney time. Gold rose 0.7 percent yesterday, its biggest gain since April 19.

The dollar traded at $1.2678 against the euro at 4:10 p.m. Sydney time, from $1.2679 late yesterday in New York according to EBS, an electronic currency dealing system.

Manufacturing

The Philadelphia Federal Reserve will today probably say its gauge of manufacturing fell, according to a Bloomberg News survey. The New York Fed two days ago said its Empire index of manufacturing unexpectedly declined.

``A weak Philly Fed report would be dire for the dollar,'' said Richard Yetsenga, a currency strategist in Hong Kong at HSBC Holdings Plc. ``Any case for the Fed being more aggressive would be done, and it could raise the possibility of the Fed pausing.''

Gold for June delivery rose 80 cents to $422.70 an ounce in after-hours trading on the Comex division of the New York Mercantile Exchange at 4:10 p.m. Sydney time.

In India, the world's biggest consumer, gold for June delivery rose 8 rupees, or 0.1 percent, to 6,027 rupees per 10 grams, or 18,744 rupees ($431) an ounce, at 10:10 a.m. on the Multi Commodity Exchange of India Ltd. in Mumbai.

To contact the reporters on this story: Matt Chambers in Melbourne at mchambers1@bloomberg.net; Claudia Carpenter in New York at ccarpenter2@bloomberg.net.

Last Updated: May 19, 2005 02:22 EDT