Gold climbs back above $1,350 as dollar surrenders gains

By Jan Harvey and Zandi Shabalala

LONDON (Reuters) - Gold edged back above $1,350 an ounce on Thursday as the dollar gave up earlier gains against a currency basket, with uncertainty over the outlook for U.S. monetary policy continuing to underpin the metal.

Palladium slid, however, after surging more than 4 percent in the previous session in a rally triggered by a wave of short-covering after recent hefty gains. The metal is testing support at the $700 an ounce level.

Spot gold was up 0.3 percent at $1,350.80 an ounce at 1420 GMT, after rising around 0.8 percent over the last two days. U.S. gold futures for December delivery were up $4.60 at $1,356.50 an ounce.

Prices have risen 27 percent so far this year, largely on expectations that the Federal Reserve will hold off on further interest rate hikes. Rising rates lift the opportunity cost of holding non-yielding gold.

"The most important factor for the gold market is what's going on in the United States with the economy, and what the Fed will do out of this data," LBBW analyst Thorsten Proettel said.

"Anything that is good for the economy in the United States will lead to higher interest rates at some time in the future, and that's bad for gold -- and the other way around."

The dollar index surrendered earlier gains against a currency basket in afternoon trade. Forex traders remain focused on whether the Fed will press ahead with rate hikes this year, after raising them for the first time in nearly a decade in December.

Investors expect the Fed, supported by positive economic data, to lift rates again in December, but other countries are increasingly looking to raise stimulus. The Reserve Bank of New Zealand cut rates on Thursday.

Palladium was down 3.3 percent at $699.10 after hitting a more than 17-month high on Wednesday at $746.10 an ounce. It had rallied sharply in thin Asian trading hourse on Wednesday, apparently as investors holding short positions rushed to cover.

"There was no fundamental reason for platinum and palladium to be up that much, as there was a little liquidity," ETF Securities' commodity strategist Martin Arnold said. "A... pullback is in order after some over-exuberance."

World shares hovered close to one-year highs on Thursday as oil prices dropped for a third straight day and the New Zealand interest rate cut got a lukewarm reaction from investors.

Silver was up 0.6 percent at $20.185 an ounce, while platinum was 1 percent lower at $1,159.85 an ounce.

(Additional reporting by Nallur Sethuraman and Koustav Samanta in Bengaluru, editing by David Evans)