Gold extends gains ahead of Fed rate decision

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold was trading near its highest in a week on Thursday, adding to overnight gains from its biggest jump in nearly a month, as sluggish U.S. inflation data eased fears the Federal Reserve would hike interest rates later this session.

Spot gold had ticked up 0.2 percent to $1,120.95 an ounce at 0638 GMT, near a one-week high of $1,124.30 reached in the previous session. The metal gained 1.3 percent on Wednesday in its biggest daily jump since Aug. 20.

"All eyes are on the Fed's interest rate decision later today which is the most anticipated announcement in years by the central bank," said James Cerisola, precious metals trader at MKS Group.

"A short squeeze across the precious complex prior to the FOMC caught the market off guard," he said, referring to the Federal Open Market Committee.

Prices got help from data on Wednesday that showed U.S. consumer prices unexpectedly fell in August. Softness in the dollar, following the inflation data, also supported gold prices.

Signs of a disinflationary trend reasserting itself are in stark contrast with a fairly healthy economy and a rapidly tightening labour market, and highlight the dilemma Fed officials face as they contemplate raising interest rates for the first time in nearly a decade.

The U.S. central bank kicked off a two-day policy meeting on Wednesday, with a decision on interest rates expected at 1800 GMT on Thursday.

Expectations that the Fed would hike rates at this week's meeting had already been lowered due to recent concerns over slowing economic growth in China and volatility in financial markets.

In a Reuters poll of 80 economists, 45 said the Fed would keep its benchmark interest rate between zero and 0.25 percent, while 35 expected a hike.

The uncertainty over the timing of a rate hike has weighed on gold all year. Higher rates could curb demand for non-interest-paying bullion.

"If rates were to be raised, then it would be no surprise to see gold prices sink quite quickly to $1,077," said Howie Lee, an analyst at Phillip Futures.

On the other hand, if the Fed leaves rates unchanged, the upside for gold prices would be limited as the move would create more uncertainty over the timing of an eventual rate hike, traders said.

Among other precious metals, silver was holding firm at $14.90, following a 3.5-percent jump in the previous session, its biggest one-day jump since May. Platinum rose for a third straight session.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford and Biju Dwarakanath)