Gold steadies above $1,240/oz as dollar edges off 10-month low

By Jan Harvey

LONDON (Reuters) - Gold steadied just above $1,240 an ounce on Wednesday as the dollar's recovery from 10-month lows dampened upward momentum in the metal after three straight sessions of gains.

Gold prices had risen 2 percent by late Tuesday from early Friday levels as the collapse of U.S. President Donald Trump's healthcare bill and waning expectations for further rate hikes from the Federal Reserve this year pressured the dollar.

The U.S. currency edged up 0.2 percent against the euro on Wednesday but stayed on the defensive as investors wagered any further tightening in the United States would be slow at best, while optimism on China's economy underpinned Asian shares and commodities.

Spot gold was at $1,241.92 an ounce at 1215 GMT, little changed from late on Tuesday, but off that session's two-week peak of $1,244.56. U.S. gold futures for August delivery were down 70 cents an ounce at $1,242.20.

"Up until today the dollar has been weakening quite a bit, which has been supportive for gold. Today, we've seen the dollar a bit stronger, so we're seeing some weakness," ING analyst Warren Patterson said.

The bank has a more optimistic view of gold prices as the year progresses, he said. "We believe a large part of the interest rate hike (and) monetary tightening expectations are already priced in, so we don't think that should weigh too much more on gold prices."

Expectations that U.S. monetary policy is on a tightening path kept gold hemmed into a narrow range in the last quarter after a strong start to the year. Signs that central banks in Europe and elsewhere are also turning away from ultra-loose monetary policies have also weighed on the precious metal.

Gold is highly sensitive to rising interest rates, as these increase the opportunity cost of holding non-yielding bullion.

Investment appetite for gold showed signs of softness, with holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, falling 5.6 tonnes to 821.45 tonnes on Tuesday, a low since early February.

Demand in the world's biggest gold market was quiet overnight, meanwhile, MKS said in a note. "(Traders in) China were net sellers on the day, which took the premium sub-$10 and suppressed the spot price back towards $1,241," it said.

Among other precious metals, silver was up 0.2 percent at $16.285 an ounce, after touching its highest in over two weeks in the previous session.

Platinum was 0.2 percent higher at $923.50 an ounce after marking its highest since mid-June on Monday, while palladium was up 0.6 percent at $868.75 an ounce.

(Reporting by Jan Harvey; additional reporting by Nithin Prasad and Arpan Varghese in Bengaluru, editing by David Evans)