Gold steadies ahead of Fed minutes after steep slide

By Jan Harvey

LONDON (Reuters) - Gold steadied on Wednesday after its biggest one-day slide in 2-1/2 months as investors awaited Federal Reserve policy meeting minutes for clues on the outlook for U.S. interest rates.

Prices edged off lows as the dollar pared early gains against the euro, which had pressured the metal to a one-week low, but remained hemmed within a narrow range.

Spot gold was at $1,330.21 an ounce at 1500 GMT, up 0.1 percent but close to an earlier low of $1,325.20. U.S. April gold futures were up $2.00 an ounce at $1,333.20.

Gold prices have fallen more than 1 percent this week as the dollar pulled back from three-year lows against a currency basket, and remain highly sensitive to any further sign of strength in the U.S. unit.

"What we're seeing in gold right now is a reaction to the climbing of the dollar as markets anticipate a more hawkish stance by the Fed," Mitsubishi analyst Jonathan Butler said.

"Expectations of higher rates, seen in yields and probably in the language of the Fed minutes later today, are underpinned by signs of rising inflation," he added.

The metal slid 1.3 percent on Tuesday, the most on any day since Dec. 7, as a rise in U.S. yields boosted the dollar and weakened the appeal of non-interest bearing gold. Benchmark 10-year Treasury yields hovered near a four-year peak on Tuesday.

Yields have risen after the U.S. Treasury Department issued more debt in anticipation of a higher deficit from last year's tax overhaul and a budget deal that will lift federal spending over the next two years.

Stocks fell in Europe on Wednesday, while the dollar remained a touch firmer against the euro as traders' near-term focus shifted to the Fed minutes.

The minutes, due to be released at 1900 GMT, will be watched for comment on inflation pressures in the world's biggest economy, which could speed up the pace of rate hikes.

Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.

Interest in physical gold has been muted this week during the Lunar New Year holiday across much of Asia, including major consumer China.

"The return of China will be closely watched for any renewed physical interest in Asia to stem the weakness," MKS said in a note, adding that the firm dollar and higher Treasury yields were likely to keep the metal under pressure.

On the investment side of the market, holdings at the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, rose 3.2 tonnes on Tuesday to 827.79 tonnes.

Among other precious metals, silver was up 0.9 percent at $16.61 an ounce, while palladium was 0.6 percent lower at $1,027.70 and platinum was little changed to $999.40.

(Additional reporting by Eileen Soreng in Bengaluru; Editing by Mark Potter/Edmund Blair/Ken Ferris)