Gold gains 1 pct as Fed stays cautious on rate rises

By Jan Harvey

LONDON (Reuters) - Gold rose 1 percent on Thursday after the Federal Reserve indicated after a two-day policy meeting that U.S. interest rates may rise more slowly than expected, knocking the dollar.

The dollar hit a one-month low against a currency basket after Fed policymakers said on Wednesday they were keeping the current near-zero interest rate and that an increase would be appropriate only after further improvement in the labour market. [ID:nL1N0Z31SS]

Gold has benefited strongly in recent years from record low U.S. interest rates, which have cut the opportunity cost of holding non-yielding gold while keeping the dollar in check.

Prices have come under pressure this year from expectations that rates will soon rise for the first time in nearly a decade.

Spot gold was up 1.1 percent at $1,197.68 an ounce at 1207 GMT, while U.S. gold futures for August delivery were up $21 an ounce at $1,197.80.

"The Fed has been very cautious about when they intend to hike interest rates," Simona Gambarini, analyst at Capital Economics, said. "They were very careful in saying they will need further proof of stability and growth in the economy before they actually increase rates."

"Some people thought they might hike rates this month or next, but that's probably not going to happen," she added. "That's why the gold price has reacted positively."

Markets are now eyeing more U.S. data due later in the day for clues about the economy and how it would affect the Fed's monetary policy. Inflation data for May and weekly jobless claims are due at 1230 GMT.

"One element which the Fed did not change and stood by was the inflation outlook," Ava Trade said in a note. "Therefore, the inflation data which is due later this morning will be of immense importance for investors."

"The dollar has been on a relentless downward spiral since last night and could find some room to breathe if the data shows some improvement or at least matches the forecast of 0.5 percent."

Traders are also focusing on developments related to the Greek debt crisis.

German Chancellor Angela Merkel said on Thursday it was still possible for Greece to reach an agreement with its international creditors, striking a conciliatory tone ahead of a key meeting despite Athens' intransigence. [ID:nL5N0Z41DP]

Silver was up 1.1 percent at $16.27 an ounce, while platinum was up 1.1 percent at $1,090.49 an ounce and palladium was down 0.1 percent at $721.50 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Dale Hudson and Mark Potter)