By Clara Denina
LONDON (Reuters) - Gold fell on Thursday, driven by the Federal Reserve signalling that it could hike interest rates next month and uncertainty over the outcome of the U.S. presidential election.
The Fed kept rates unchanged on Wednesday, but said the economy had gained steam and job gains remained solid. Policymakers also expressed more optimism that inflation was moving toward their 2 percent target.
Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding assets, while also boosting the dollar, in which the metal is priced.
Spot gold was down 0.7 percent at $1,287.27 an ounce at 1139 GMT. It touched a one-month high of $1,307.76 in the previous session.
U.S. gold futures fell 1.5 percent to $1,288.
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"The fact that the Fed made some hawkish comments opening up to a rate increase in December could be seen as a negative for gold," Mitsubishi Corp analyst Jonathan Butler said.
"But the narrowing of the polls between Clinton and Trump is more important in terms of gold's positioning this week. We could see more gains before Tuesday, as the dollar retreats and safe havens such us the Japanese yen or the Swiss franc increase."
Narrowing polls have led markets to price in a greater chance that Republican Donald Trump might defeat his Democratic rival Hillary Clinton in next week's election, perhaps remembering the turmoil that followed the surprise Brexit vote. [MKTS/GLOB]
"The tightening U.S. election has generated enough uncertainty to propel the market higher," HSBC said in a note.
The dollar was down 0.1 percent against a basket of six main currencies, ahead of important non farm payrolls data, which will be released on Friday. [FRX/]
Employers are expected to have added 175,000 jobs in October, according to the median estimate of 106 economists polled by Reuters.
"Even bad data won't change the idea of a rate hike as the Fed has shown that there is a high probability for a rate hike in December," Jiang Shu of Shandong Gold Group said.
Among other precious metals, silver fell 2.2 percent to $18.03, sharply retreating from a high of about $18.73 on Wednesday, its best level since Oct. 4.
Platinum was down 1.2 percent at $978 and palladium dropped 0.6 percent to $625.
(Additional reporting by Nallur Sethuraman in Bengaluru; Editing by Alexander Smith)