Gold rises as dollar weakens ahead of Fed policy outcome

By Clara Denina

LONDON (Reuters) - Gold rose for a third straight session on Wednesday as weaker than expected U.S. data weighed on the dollar ahead of the Federal Reserve's monetary policy decision later in the day.

The Fed is likely to keep interest rates steady, with the focus resting squarely on the tone of its statement and any hints on the timing of any future increases. The U.S. central bank raised rates in December for the first time in nearly a decade.

Spot gold was up 0.3 percent at $1,246.06 an ounce by 1154 GMT.

"The gold market is on hold before the Fed meeting ... but nobody thinks the Fed will hike rates today and June is hardly an option, which should be negative for the dollar and positive for gold," Danske Bank senior analyst Jens Pedersen said.

Data on Tuesday showed orders for long-lasting U.S. manufactured goods rebounded far less than expected in March, suggesting that business spending and economic growth were weak in the first quarter. Another report showed an ebb in consumer confidence in April.

"Gold ground higher, continuing to trade in a tight range. The weaker dollar has supported demand, but investors remain wary heading into the central bank meetings," ANZ said in a note.

"An unchanged economic outlook and a more balanced assessment of the risks should enhance the Fed's confidence to proceed with further normalisation."

Gold is highly sensitive to rising interest rates, which lift the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.

Bullion has rallied 17 percent this year on speculation that the Fed might not raise rates this year amid uncertainty over the global economy.

OCBC Bank said the Fed "could strike a careful balance between calling for gradual policy normalisation and making sense of the recent spate of mixed economic data amid slightly stronger crude oil prices".

A slump in demand from key Asian consumers is likely to push gold prices lower in the short term, GFMS analysts at Thomson Reuters said in a report on Tuesday.

Global gold demand tumbled by 24 percent year on year to 781 tonnes in the three months to March 31, its weakest quarter in seven years, GFMS said.

Among other precious metals, silver rose 0.9 percent to $17.30 an ounce, platinum added 0.7 percent to $1,014.68 and palladium was down 0.1 percent to $599.80.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Dale Hudson and David Goodman)