Gold hovers below three-and-a-half-month high, but eyes weekly gain

SINGAPORE (Reuters) - Gold hovered below a 3-1/2-month high on Friday after strong U.S. inflation data supported the dollar, but the metal was set to post its biggest weekly jump in four weeks on bets the Federal Reserve will not hike interest rates this year.

FUNDAMENTALS

* Spot gold was steady at $1,181.80 an ounce by 0040 GMT. It had hit a 3-1/2-month high of $1,190.63 in the previous session, but ended the day lower.

* The metal snapped a four-day rally on Thursday after data showed a surprise 0.2-percent rise in the September U.S. core consumer price index, boosting the year-on-year gain to 1.9 percent and pushing it closer to the Fed's 2-percent goal.

* The data provided some relief to the dollar, which has been battered by a run of poor U.S. indicators, helping it move away from seven-week lows hit earlier in the week.

* But gold was on track for a 2-percent weekly jump as markets believe recent weak U.S. data in the backdrop of sluggish data out of China would prompt the Fed to stand pat on rates until next year.

* Gold benefits from low interest rates that cut the opportunity cost of holding non-yielding assets.

* Many Fed watchers are exasperated by the mixed messages from the U.S. central bank in recent weeks. Fed Chair Janet Yellen and other officials have said they expect a rate hike will be needed by the end of this year, but two Fed governors this week urged caution.

* Fed policymakers are not as divided as it may appear and are generally operating under the same framework for determining when to raise interest rates, one Fed official said on Thursday, while another said the differences of opinion reflect the countervailing economic data.

* Investor sentiment towards bullion has improved. Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.73 percent to 700 tonnes on Thursday, their highest since mid-July.

* Among other precious metals, silver was headed for a third straight weekly gain, while platinum was eyeing its second weekly jump. Palladium, however, snapped a five-week winning streak, and was headed for a 1-percent drop.

MARKET NEWS

* Asian shares got a bright start on Friday, catching some of Wall Street's shine after upbeat U.S. price and jobless claims data calmed some recent concerns about the strength of the U.S. economy.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford)