By Marcy Nicholson and Clara Denina
NEW YORK/LONDON (Reuters) - Gold rose more than 1 percent to a three-week high on Wednesday, bolstered by a weaker dollar on declining expectations that the U.S. Federal Reserve will raise interest rates any time soon.
Investors have almost priced out the chance of a rate increase at the Fed's June 14-15 policy review, and see the likelihood of a July rate hike reduced to around 26 percent since disappointing jobs data last week and comments by Fed Chair Janet Yellen on Monday.
This caused the U.S. dollar to fall to a five-week low against a basket of currencies. [USD/]
Spot gold rose by as much as 1.6 percent to $1,263.81 an ounce, its strongest since May 20, and was up 1.4 percent at $1,260.57 by 2:48 p.m. EDT (1848 GMT).
U.S. gold settled up 1.2 percent at $1,262.30 an ounce.
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"Gold could easily see a further $20 an (ounce) increase, given favourable macroeconomic news, but only a break above $1,290 would encourage new demand to come in," MKS SA head of trading Afshin Nabavi said.
Gold's gains lifted the rest of the precious metals, with silver hitting $17 an ounce for the first time in three weeks, up 4 percent. Palladium also touched a three-week high at $570.28, while platinum marked its highest in two weeks at $1,019.58 an ounce.
"We know the Fed wants to carry on normalizing monetary policy but they won't ... if the economy is actually slowing," Macquarie analyst Matthew Turner said.
He expects the Fed at its June meeting to reiterate Yellen's message on Monday when she gave a largely upbeat outlook for the U.S. economy but did not specify whether the Fed will raise rates over the summer months.
Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding bullion.
In Asia, the world's biggest gold consumer, China kept its reserves unchanged in May, the central bank said on Tuesday, but analysts expect it will keep purchasing bullion to diversify its forex reserves.
Meanwhile, gold jewellery demand in top consumers China, India and the United States is expected to improve, said ABN Amro analyst Georgette Boele.
"In the case of the U.S., the savings rate is very high, and we expect this to decline modestly, reflecting that consumers will spend more and save less," Boele said. "Part of these funds could flow into the purchase for gold jewelry."
(Additional reporting by Koustav Samanta in Bengaluru; Editing by David Evans and Will Dunham)