Gold hits more than one-week high as dollar slips boosting its demand

Gold prices climbed more than 1% on Friday to an over one-week high, as a weaker dollar boosted demand for the yellow metal, even as U.S. Federal Reserve policymakers vowed to raise interest rates to tame inflation pressures.

Spot gold was up 0.7% at $1,719.89 per ounce by 1230 GMT after rising to its highest since Aug. 30 at $1,729.29 earlier in the session.

Bullion, up 0.5% so far this week, was heading for its first weekly gain in four.

U.S. gold futures rose 0.6% to $1,730.90.

"The U.S. dollar index dropping back to a one-week low has boosted the price of gold, and there may well be further strength into the inflation report and perhaps even beyond that," David Jones, chief market strategist at Capital.com said.

The dollar dropped over 1%, making greenback-priced bullion less expensive for overseas buyers, while the benchmark 10-year U.S. Treasury yields also pulled back from recent highs. [USD/] [US/]

Investor focus now shifts to August U.S. consumer price index report due next week after recent hawkish comments from Fed Chair Jerome Powell cemented bets of a large interest rate hike to fight inflation.

Meanwhile, the European Central Bank raised its key interest rates by an unprecedented 75 basis points on Thursday and promised further hikes.

Higher interest rates increase the opportunity cost of holding non-yielding bullion.

The gold market continues to see a slow and steady reduction of exchange-traded funds (ETF) and trading volumes on U.S. futures markets continue to weaken, suggesting that the move higher is unlikely to be sustained, said independent analyst Ross Norman. [GOL/ETF]

Elsewhere, spot silver added 0.4% to $18.6357 per ounce and was set for a weekly gain.

Palladium rose 0.9% to $2,157.79 and was headed for its best week since July.

Platinum edged 0.1% lower to $878.54, but was on track for its biggest weekly gain since early June.

In the physical gold market, demand in some Asian hubs remained firm this week as lower prices lured buyers. [GOL/AS]

(Reporting by Arundhati Sarkar in Bengaluru; Editing by Krishna Chandra Eluri and Maju Samuel)