By Clara Denina
LONDON (Reuters) - Gold edged higher as the dollar drifted lower on Monday, although expectations of tighter U.S. monetary policy kept a lid on its gains.
Spot gold was up 0.5 percent at $1,139.43 an ounce by 1536 GMT. It fell to $1,122.35, its weakest since Feb. 2, on Thursday under pressure from a stronger dollar after hawkish rate forecasts from the Federal Reserve.
U.S. gold futures gained $3.70 to $1,141.20 an ounce.
The Fed hiked rates for the first time in a year last week and projected three more increases in 2017, up from the two projected in September.
"Coming at a time when investors are mindful of the stimulus effects of the new incoming U.S. regime (this) is likely to be good for equity valuation and weigh on gold and risk-off assets, at least in the short term," Mitsubishi Corp strategist Jonathan Butler said.
The dollar was down 0.1 percent against a basket of six main currencies, European equities were mixed and U.S. stocks were higher as investors awaited a speech by Federal Reserve Chair Janet Yellen on "the State of the Job Market".
Richmond Fed President Jeffrey Lacker said on Friday the Fed faces challenges in gradually cooling off the U.S. economy.
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.
"Going forward, the twin problem of high real interest rates, which have been rising on the back of a sharp increase in nominal yields, and high dollar will weigh on gold," ETF Securities analyst Martin Arnold said.
The benchmark 10-year U.S. Treasury yield rose to its highest since September 2014 on Thursday, before settling at around 2.6 percent.
Holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.6 percent to 836.99 tonnes on Friday. Holdings are down over 11 percent since November.
Hedge funds and money managers cut their net long position in COMEX gold contracts for the fifth straight week, taking it to a 10-month low in the week to Dec. 13, U.S. Commodity Futures Trading Commission data showed on Friday.
Silver fell 0.4 percent to $16.03 an ounce. Platinum fell 1 percent to $918.60 and palladium was down 1.8 percent at $680.22 an ounce, after falling to a one-month low on Friday.
(Additional reporting by Swati Verma in Bengaluru; Editing by Susan Thomas, Greg Mahlich)
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