Gold gains on softer dollar, views on Fed rate outlook

By Clara Denina

LONDON (Reuters) - Gold continued to gain on Tuesday as the dollar eased in the wake of disappointing U.S. economic data that has raised doubts over a Federal Reserve rate rise this year.

Spot gold ticked up 0.2 percent to $1,138.11 an ounce by 1156 GMT. Prices had hit a one-week high above $1,140 in the previous session, supported by a weaker dollar.

The metal is still largely holding on to Friday's 2.2 percent jump, the biggest one-day rise since Jan. 15 following data that showed U.S. employers had slammed the brakes on hiring over the last two months.

After Friday's soft jobs report, data on Monday showed the pace of growth in the U.S. services sector decelerated in September as new orders and business activity slowed. However, some analysts said a U.S. rate hike in December could not be ruled out entirely.

"The Fed is worried about the implications of continuing low inflation or even outright deflation because of low oil prices, but a December rate hike is still possible," Mitsubishi Corp strategist Jonathan Butler said.

"And assuming that we see a rate lift-off in December, the short-term outlook for gold is not bullish."

The dollar was down 0.3 percent against a basket of currencies and European shares recovered from an earlier drop.

Markets believe signs of sluggishness in the U.S. economy, along with weakness in China and volatility in financial markets, could prompt the Fed to hold rates.

Higher rates would increase the opportunity cost of holding gold. The non-interest-paying asset, which has benefited from years of ultra-low U.S. rates, has fallen nearly 4 percent this year on expectations that the Fed will move to increase rates for the first time in nearly a decade.

SPDR Gold Trust, the top gold-backed exchange-traded fund, saw a small outflow of 0.22 tonnes on Monday. That is the fund's first outflow in two weeks.

Among other precious metals, silver was up 0.1 percent at $15.62, near a three-month high of $15.71 hit on Monday. It has gained nearly 8 percent in the last two sessions.

Platinum rose 0.7 percent to $918.25 an ounce, having hit a near seven-year low of $888 on Friday.

Palladium was up 0.3 percent at $691.25. It hit its highest since June at $710.50 in the previous session on expectations that demand for gasoline cars, where the metal is used in catalysts, would rise due to the Volkswagen diesel engine emissions scandal.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by David Evans and Susan Fenton)