Gold dips in Asia as Fed move to hold US rates adds to uncertainty

Spot gold sheds 0.3% to $1,127.70 an ounce, after climbing to a two-week high of $1,133.20 previous session

Gold dropped from a two-week high on Friday, giving back some of the sharp gains from the last two days, as the US Federal Reserve's decision to hold interest rates steady this week added to uncertainty over the timing of an eventual rate hike.

Spot gold fell 0.3 percent to $1,127.70 an ounce at 0641 GMT, after climbing to a two-week high of $1,133.20 in the previous session. Still, the metal was on track to snap a three-week losing streak with a near 2-percent gain.

The Fed kept interest rates unchanged on Thursday, in a bow to worries about the global economy, financial market volatility and sluggish inflation at home. But the US central bank maintained its bias towards a rate hike sometime this year.

Gold had been weighed down all year on uncertainty over when the Fed would hike interest rates from record-lows. Higher rates could dent demand for non-interest paying bullion, while boosting the dollar.

Weakness in the dollar and stock markets could prompt a rally in gold prices in the near term but the gains are unlikely to last, said INTL FCStone analyst Edward Meir.

"Because the Fed has made clear that it intends to raise rates by year-end, the markets will eventually start bidding the dollar higher and we could see gold's up move to be relatively short-lived," he said.

The Fed on Thursday also forecast inflation would creep only slowly toward its 2 percent target, which one bullion trader said was a negative for gold, often seen as an inflation-hedge.

The Fed is due to hold two more policy meets this year, in October and December.

A majority of Wall Street's top banks now expect the Fed to begin hiking rates in December, according to a Reuters poll conducted on Thursday.

The dollar nursed losses on Friday after slumping to a three-week low against a basket of major currencies in the previous session.

Physical demand from Asia wasn't offering much support to gold prices.

Gold discounts in India, the world's second-biggest consumer, widened this week as dealers struggled to offload stocks amid sluggish demand.

Chinese premiums held steady at $5-$6 despite the overnight jump in prices, but failed to boost global prices.