By Swati Verma
BENGALURU (Reuters) - Gold edged up on Thursday to hold just above an eight-week low hit earlier this week, with the U.S. dollar declining against the yen.
Spot gold was up 0.2 percent at $1,220.56 per ounce by 0316 GMT. It hit an eight-week low of $1,213.81 on Tuesday.
U.S. gold futures also gained 0.2 percent, to $1,220.70 an ounce.
"Combined with a moderation in confrontational foreign policy rhetoric from the Trump administration in May, a 'market friendly' election result in France is helping to unwind demand for gold to hedge against political risk," BMI Research said in a note.
"Receding risk aversion in Europe and hawkish language from the U.S. Federal Reserve will cap gold demand in the near term," BMI added, cutting its 2017 average gold price forecast to $1,250 per ounce from $1,300.
The Fed should hike interest rates three more times this year, Boston Fed President Eric Rosengren said on Wednesday.
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Markets are pricing in around a 90-percent chance that the economy is strong enough for the Federal Reserve to raise interest rates at its meeting next month.
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.
The dollar edged lower after notching an eight week high against the yen in Asian trade. [USD/]
Spot gold is expected to test support at $1,209 per ounce, a break below which could cause a further loss to the next support at $1,188, according to Reuters technical analyst Wang Tao.
"From a pure technical-fundamental aspect, everybody would be eying $1,200 as the next level of support, but I think $1,215 support here is not out of the question," said Spencer Campbell, general manager with Kaloti Precious Metals in Singapore.
Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, have fallen over 8 tonnes in the past two weeks.
"We have seen some ETF liquidation as people are feeling a little bit comfortable politically," Campbell said.
"Military exercises are being expanded across Asia, in particular the Korean Peninsula. The lack of news in that particular area has taken the edge off the prices of gold, so the pull back has been inevitable."
Spot silver gained 0.6 percent to $16.23 an ounce.
Platinum was up 0.2 percent at $910.24, while palladium fell 0.3 percent to $796 an ounce.
(Reporting by Swati Verma in Bengaluru; Editing by Richard Pullin and Joseph Radford)