Gold pared gains after hitting a one-month high in a choppy market on Wednesday as the dollar rose further following stronger-than-expected U.S. manufacturing data, dealers said.

Spot palladium rose to its highest in nearly four months, while platinum eased after climbing to one-month highs.

Gold fell as low as $632.80 an ounce before bouncing back to $644.90, its highest since Dec. 5. It was quoted at $641.30/642.30 by 1535 GMT, against Tuesday's close of $640.20/641.20 in London.

"Gold has started the year quite well. We expect the dollar to weaken a bit in the first quarter and I think that's positive for gold," said Matthew Turner, analyst at Virtual Metals.

"The trend might continue in the second quarter as well."

But the dollar extended gains after the Institute for Supply Management's reading on the factory sector beat expectations for December, following a surprise contraction in the previous month.

"Clearly the key influence remains the dollar," Stephen Briggs, economist at SG Corporate and Investment Banking, said.

A rise in the dollar makes gold costlier for holders of other currencies and often lowers bullion demand.

The market also awaited minutes from the U.S. Federal Reserve's policy meeting, due later on Wednesday, for clues to interest rates and the dollar outlook.

"Dollar movements will be closely watched in the coming sessions with the yellow metal still vulnerable short-term to profit taking after moving up on limited volumes over the Christmas period," TheBullionDesk.com said in a daily note.

CENTRAL BANK BUYING

The market also noted gold buying by a European central bank last month, a period which saw selling of the metal by other central banks in the region under an agreement that limits gold sales.

Dealers said any buying of gold by central banks was positive for the market.

The European Central Bank said in a statement last week that figures to the week ended Dec 22. reflected the selling of gold by one European central bank and "a net purchase by another Eurosystem central bank". It gave no further details.

Dealers said the market was expected to remain choppy in the coming days.

"Typically market liquidity only properly returns in the second week of January, and a new trading year brings fresh budgets for investors to act on underlying convictions," said Robin Bhar, analyst at UBS Investment Bank.

In other precious metals, palladium touched $340 an ounce, its highest since early September, and was last quoted at $338/344. It closed in London on Tuesday at $333/338.