By Jan Harvey
LONDON (Reuters) - Gold eased towards the previous day's three-month low on Wednesday as the dollar index held near its highest level in more than a year, underpinned by expectations that the Federal Reserve may be set to signal a rise in interest rates.
The dollar has been trending higher since early July, supported by talk of a possible Fed rate rise. That would likely hurt gold, due both to the impact on the dollar, in which it is priced, and because it would lift the opportunity cost of holding non-yielding bullion.
The dollar index held near Tuesday's 14-month high on Wednesday. Spot gold was down 0.3 percent at $1,252.10 an ounce at 1124 GMT.
"It's hard to see any major catalyst to the upside (for gold) in the short term," Mitsubishi precious metals analyst Jonathan Butler said. "Next week, we have the FOMC meeting and no doubt we will see some choppy price action in anticipation of the next move from the Fed."
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"If predictions are to be believed, the Fed is going to outline not only its timetable for ending quantitative easing, but also the potential for a rise in interest rates in the first half of next year," he said. "Some pricing in of that may result in further gold weakness."
Gold prices rose in the first half of the year after plunging 28 percent in 2013, but weakness in the current quarter has cut the gain since end-December to just 4 percent.
The metal had been underpinned by the tension between Russia and the West over Ukraine, but signs the conflict may be stabilising has undermined that support.
A Kremlin adviser said on Wednesday that the Russian and Ukrainian presidents, Vladimir Putin and Petro Poroshenko, are broadly satisfied with how a ceasefire between Kiev and pro-Russian forces is holding in eastern Ukraine.
U.S. gold futures for December delivery were up $4.50 an ounce at $1,253.00.
LITTLE SUPPORT FROM CHINA
Prices took little support from demand for physical metal in Asia, the leading market for gold, dealers said.
"The Shanghai Gold Exchange was today trading at a discount to loco London gold," MKS said in a note on Wednesday. "The last time that occurred was when the USDCNY (dollar/yuan rate) moved from 6.05 to 6.28 between March and June of this year."
"Currently the USDCNY remains suppressed, so with the gold price lower and the CNY stronger ... it still seems that physical demand is still soft from the world's largest bullion consumer," it said.
In India, the second-largest gold buyer, Trade Minister Nirmala Sitharaman said the government is not considering an immediate cut in gold import duty.
New Delhi had hiked the import duty on the yellow metal last year to 10 percent to limit overseas purchases and trim its bloated current account deficit. However, a dramatic improvement in the deficit had raised market expectations of a duty cut.
Among other precious metals, silver was down 0.2 percent at $18.99 an ounce. Spot platinum was up 0.2 percent at $1,381.74 an ounce and spot palladium was up 0.1 percent at $856.90 an ounce.
Platinum fell to its lowest since early February on Wednesday at $1,376 an ounce, while palladium hit a one-month low of $849 an ounce, having fallen 2.3 percent on Tuesday.
The metal, which hit a 13-1/2 year high of $910 an ounce earlier this month, has come under pressure as concerns over a potential escalation of the situation in Ukraine abate. Russia is the world's number one producer of palladium.
(Reporting by Jan Harvey; Editing by David Evans and Pravin Char)
