By Clara Denina
LONDON (Reuters) - Gold rose nearly 1 percent on Tuesday as the dollar and global equities dropped on fresh signs of economic weakness in China and uncertainty over the timing of the Federal Reserve's first interest rate increase in nearly a decade.
Activity in China's factory sector shrank at its fastest rate in at least three years in August as domestic and export orders tumbled, increasing investor concern that the world's second-largest economy could be lurching towards a hard landing.
Spot gold rose 0.7 percent to $1,142.40 an ounce by 0911 GMT, while U.S. gold for December delivery climbed 0.8 percent to $1,142.
The metal posted its biggest weekly drop in five last week, weighed by a steady dollar and strong U.S. economic data, supporting the case for a rate rise as early as this month.
Gold, which is on track for a 4 percent fall this year, would suffer from higher interest rates because they would increase the opportunity cost of holding the metal. Conversely, a delayed rate increase would relieve some selling pressure, if only temporarily.
Also Read
"As long as the Chinese growth anxieties are there, the Fed will have to find some other remedy for their itching to raise the interest rate," said Naeem Aslam, chief market analyst at AvaTrade. "All in all, in the short term we could see another leg up for gold, but nothing mammoth."
The dollar fell 0.6 percent against a basket of leading currencies, largely because investors prefer low-yielding currencies such as the euro and the Japanese yen for better returns.
Doubts over whether the Federal Reserve will raise rates at its Sept. 16-17 policy meeting have resurfaced in light of persisting market turbulence in recent weeks.
But comments from the U.S. central bank's Vice Chairman, Stanley Fischer, last week suggested that a September rate hike remains an option.
Later on Tuesday investors will turn their attention to a survey of U.S. manufacturing activity, but the biggest focus of the week is the August non-farm payrolls report on Friday. [ECONUS]
"I think if we did see a very strong number in the non-farm payrolls this week, it would certainly give them (the Fed) an opportunity ... to make their move in September," said Ric Spooner, chief market analyst at CMC Markets in Sydney.
In other metals, spot palladium fell 1.7 percent to $587.50 an ounce and platinum dropped 0.3 percent to $1,004. Silver was down 0.1 percent at $14.59.
(Additional reporting by Manolo Serapio Jr in Manila; Editing by David Goodman)