The dollar index fell 0.8 percent against a number of currencies as fears about the Dubai debt crisis waned across the international markets.
Demand for gold has been fuelled by moves by central banks to diversify assets.
Investors took heart from Dubai World's announcement that it was in talks with creditors over $26 billion of its estimated $60 billion debt. The report eased worries that the emirate's investment vehicle would default on all of its debt.
A weaker dollar makes gold cheaper for users of rival currencies and stimulates demand for the precious metal. This in turn pushes up the price of gold, which is denominated in dollars.
An analyst at the Commerzbank commodity, Eugen Weinberg, said the low interest environment and gold's outperformance continue to draw investors hoping to capitalize on cheap money and chase the trend.
"As long as the dollar stays weak, I don't see why the trend should worsen," he said.
Worries that the dollar will be saddled by the US growing fiscal deficit will make investors turn to gold to hedge against a weaker dollar, said Mitsubishi Corporation analyst, Tom Kendall.
"The conundrum is [the government and the Federal Reserve] talk a stronger dollar but they need a weaker dollar to help deflate this massive debt pile," he added.