Gold falls on Fed rate hike, dollar surge

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold slipped on Thursday to give back some of its overnight gains, with trading choppy as the dollar surged after the Federal Reserve hiked U.S. interest rates for the first time in nearly a decade.

The U.S. central bank raised the range of its benchmark interest rate by a quarter of a percentage point on Wednesday, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

Gold has slumped nearly 10 percent this year, largely on uncertainty around the timing of the rate rise and on fears that higher rates would hit demand for the non-interest-paying metal. It had fallen to a near-six-year low earlier this month.

Spot gold had dipped 0.6 percent to $1,066.20 an ounce by 0609 GMT. The metal had rallied before the Fed decision on Wednesday and managed to hold most of those gains after the central bank statement, ending the day up 1.2 percent.

U.S. gold fell 1 percent to a session low of $1,064.20, following a 1.4 percent gain in the previous session.

"This morning, it is more of a dollar story," said a Hong Kong-based precious metals trader.

"The market pretty much expected the comments we heard from the Fed," the trader said, adding that the most-likely move for gold was to go lower.

The dollar index, which measures its strength against a basket of six major currencies, rose 1 percent on Thursday. A robust dollar makes greenback-denominated gold more expensive for holders of other currencies.

Other precious metals also took a hit from a stronger dollar. Palladium fell nearly 3 percent to a session low of $552.22 an ounce, while silver and platinum dropped about 1 percent each.

With the much anticipated first rate hike out of the way, the focus now shifts to the pace of future rate increases.

The U.S. central bank made clear the rate hike was a tentative beginning to a "gradual" tightening cycle.

But the rate forecasts, or dot points, from Fed members were a little higher than many expected with 100 basis points of hikes pencilled in for next year and a terminal rate of 3.5 percent.

The divergence between the Fed forecasts and the market could hurt gold prices as investors begin to align their views with the central bank.

"Gold has been extraordinarily sensitive to perceived changes in monetary policy for many months," said HSBC analyst James Steel. "The rate rise may finally clear the deck and remove rate-related uncertainty from the bullion market."

The Fed action leaves gold positioned for some modest gains, largely from short-covering, but much of the impact on bullion will come from the dollar move, he said.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford and Subhranshu Sahu)