Gold hits near three-week high as Fed rate decision weighs on dollar

By Clara Denina

LONDON (Reuters) - Gold rose to a near three-week high on Friday as the Federal Reserve's decision to leave U.S. interest rates unchanged weighed on the dollar.

Spot gold was up 0.7 percent at $1,138.86 an ounce at 1348 GMT, having earlier touched its highest since Sept. 1 at $1,141.30, keeping it on track to snap a three-week losing streak.

"If it's December and not September it does seem largely irrelevant to the price of gold," Macquarie analyst Matthew Turner said of any eventual rate increase.

"More supportive is the perception that the Fed seems to have lost a little confidence itself in the rate hike cycle," he added. "But we still think there will be a hike in December and therefore rallies are going to be capped."

The Fed kept interest rates unchanged on Thursday in a bow to worries about the global economy, financial market volatility and sluggish inflation at home. It left open the possibility of modest rate rises later this year.

Gold has benefited in recent years from ultra-low rates, which cut the opportunity cost of holding the non-yielding asset while weighing on the dollar, in which the metal is priced.

Concerns over slowing economic growth in China, mixed economic data and volatility in financial markets have increased doubts about the timing of any U.S. rate increase, which had been expected as early as this month.

The dollar slumped to a three-week low against a basket of major currencies, while European shares came under pressure from the Fed's downbeat comments on the state of the economy.

The Fed also forecast that inflation would creep only slowly toward its 2 percent target, which could be seen as a negative for gold, often bought as an inflation hedge.

A majority of Wall Street's top banks now expect the Fed to begin increasing rates in December, according to a Reuters poll conducted on Thursday.

On the physical side, gold discounts in India, the world's second-biggest consumer, widened this week as dealers struggled to offload stocks amid sluggish demand.

Chinese premiums held steady at $5-$6 despite the overnight jump in prices.

Silver rose 0.4 percent to $15.20 an ounce.

The longer-term outlook for the metal remains bearish, Julius Baer analyst Carsten Menke said in a note, due to its dependence on gold's movements and investment demand.

Platinum fell 0.3 percent to $977.24 and palladium was down 0.7 percent at $603.72.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by David Goodman and William Hardy)