Gold edges down but heading for weekly gain on Fed rate outlook

By Clara Denina

LONDON (Reuters) - Gold edged down on Friday, as the dollar steadied above a five-month low, but the metal remained on track for a weekly gain after the Federal Reserve scaled down rate hike expectations.

Spot gold was down 0.3 percent at $1,252.91 an ounce by 1457 GMT, while U.S. gold fell 0.9 percent to $1,253.80 an ounce. Spot gold was up around 0.4 percent on the week.

"There has been a bit of selling into the rally in the past couple of days but on whole gold has managed to hang on to its gains," Mitsubishi Corp analyst Jonathan Butler said.

"With the dovish overall macro outlook - the Fed's more dovish stance and ECB and Bank of Japan also pursuing very aggressive stimulus policies - affecting the strength of the dollar and U.S. Treasury yields, gold should benefit."

The dollar rose 0.1 percent against a basket of main currencies, but was still near a 17-month low against the yen and set to end the week 1.5 percent lower.

The U.S. central bank held interest rates steady on Wednesday and indicated it would tighten policy this year, but fresh projections showed policymakers expect two quarter-point increases by year-end, half the number forecast in December.

Expectations the Fed would raise rates steadily this year had faded since the bank's initial hike in December, as concerns over global growth roiled financial markets.

A low interest rate environment tends to decrease the opportunity cost of holding non-yielding bullion.

Silver rose more than 1 percent to its highest since late October at $16.13. It was up 4 percent this week.

"We saw the added interest moving into silver and that could be due to the fact that gold is up 18 percent this year and although investors are still looking for upside potential, they are also starting to look for relative value," Saxo Bank senior manager Ole Hansen said.

"You can argue the fundamentals in silver potentially improving over the year, with supply being reduced from the mining of other metals."

Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 1.50 percent to 807.09 tonnes on Thursday from 795.20 tonnes on Wednesday.

Platinum fell 1.4 percent to $966.55 and palladium lost 0.9 percent to $585.55.

(Additional reporting by Naveen Thukral in Singapore; Editing by Keith Weir and Mark Potter)