Gold steadies as softer dollar lends support ahead of Fed

By Jan Harvey

LONDON (Reuters) - Gold steadied on Monday as a retreat in the dollar helped arrest the previous session's 1.3 percent slide, but moves were muted ahead of a Federal Reserve policy meeting later this week.

The Fed is not expected to raise interest rates at this week's meeting, but markets will be looking for the U.S. central bank's take on the global economy and its monetary policy outlook.

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

Spot gold was at $1,231.13 an ounce at 0935 GMT, little changed from late on Friday, while U.S. gold futures for June delivery were up $2.90 an ounce at $1,232.90.

Prices have risen more than 16 percent so far this year as expectations for a Fed rate hike faded, the dollar softened, and investors showed renewed interest in commodities. Their gains have slackened in recent weeks, however.

"There are two general themes that are lifting gold as well as other commodities -- the weaker dollar, which probably has a bit further to run, and renewed enthusiasm for China," Dan Smith, senior analyst at Oxford Economics, said. "The danger is that this is moving to a bubble in some areas."

The dollar eased 0.2 percent against a basket of currencies on Monday, while oil prices dipped as traders took profits after three weeks of gains and European shares retreated ahead of central bank meetings in the United States and Japan.

Economists expect the Fed to deliver a rate hike in June, and follow up with another by the end of this year. But interest rate futures show less conviction, underscoring an ongoing wide gap between markets and policymakers on the path of rates.

"The direction taken by the gold price in the short term is likely to depend on the (Fed)," Commerzbank said in a note. "If it raises the prospect of another rate hike in the near future at its meeting on Wednesday, this is initially likely to weigh on the gold price."

Speculators continue to bet on rising gold prices. Data on Friday showed that hedge funds and money managers raised their bullish positions in COMEX gold contracts to the highest in 3-1/2 years.

Among other precious metals, silver, which rallied 4.5 percent last week, touching an 11-month high on the way, was down 0.4 percent at $16.85 an ounce.

Platinum was down 0.7 percent at $999.50 an ounce and palladium was down 0.7 percent at $596.27 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore, editing by Louise Heavens)