Gold firm as dollar catches breath ahead of Fed rate decision

By Swati Verma

BENGALURU (Reuters) - Gold prices edged higher on Wednesday on a weaker dollar and as markets waited for the outcome of the U.S. Federal Reserve's policy meeting later in the day.

Spot gold was up 0.3 percent at $1,161.73 an ounce by 0633 GMT and U.S. gold futures were 0.4-percent higher at $1,163.70.

The dollar index, which measures the greenback against a basket of currencies, was down 0.2 percent at 100.88, having slipped from this week's high of 101.78 touched early on Monday.

"(The rise in gold prices) is because of the weaker dollar and also the anticipation of what the Fed will decide," said Brian Lan, managing director at Singapore-based gold dealer GoldSilver Central.

"The things that will move the markets more would definitely be on how many times the Fed will raise interest rates next year."

The Fed is widely expected to increase U.S. interest rates at this week's Federal Open Market Committee meeting, with investors looking for clues on the central bank's views on further hikes in 2017.

Higher U.S. rates raise the opportunity cost of holding non-yielding bullion.

The outcome of the policy meeting will be announced at 1900 GMT, followed by Chair Janet Yellen's news conference half an hour later.

"A Fed rate hike has been 100 percent priced in, and the market expects that maybe Yellen's comments tonight on rate hike projections for the next year will not be too hawkish," said Helen Lau, an analyst at Argonaut Securities in Hong Kong.

"So that is the reason why dollar has weakened a little bit, and that's what is supporting gold prices."

Meanwhile, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, are down over 9 pct since November.

"People who invest in ETFs will have a relatively longer term view, so the current rotation is rotate out of gold to risky assets, expecting that the U.S. economic situation will improve," Lau said.

Asia shares crept cautiously higher on Wednesday and the two-year U.S. debt yield rose to a 6-1/2 year high on Tuesday.

"ETF liquidation shows investors' uninspired gold view. Until the 'slow bleed' out of the ETFs ceases, it will be difficult for gold to rally," HSBC analyst James Steel wrote in a note.

Elsewhere, silver was up 0.7 percent at $17.02 per ounce after falling nearly 1 percent in the previous session.

Platinum rose 0.4 percent to $936 an ounce.

Palladium was unchanged at $728.80 an ounce, having risen about 1 percent on Tuesday.

(Reporting by Swati Verma in Bengaluru; Editing by Joseph Radford)