Gold at one-week high, Fed shows no sign of speeding up rate hikes

By Marcy Nicholson and Zandi Shabalala

NEW YORK/LONDON (Reuters) - Gold rallied more than 1.5 percent to a one-week high on Wednesday, as the U.S. Federal Reserve called for gradual monetary tightening after raising interest rates by an expected 25 basis points for the second time in three months.

The central bank said in its policy statement that further hikes would only be "gradual," with officials sticking to their outlook for two more rate hikes this year and three more in 2018.

The U.S. dollar index (.DXY) fell to a two-week low, helping lift gold which is denominated in dollars and so became cheaper for holders of other currencies, while the 10-year Treasury yields tumbled and U.S. stock markets extended gains. [MKTS/GLOB]

Spot gold (XAU=) was up 1.6 percent at $1,217.81 an ounce by 3:01 p.m. EDT (1901 GMT), after rising to $1,219.36, the highest since March 7. It was on track for its biggest one-day jump since September.

U.S. gold futures (GCcv1), which closed ahead of the Fed statement, settled down 0.2 percent at $1,200.70.

"After loitering around $1,200 for most of the session, gold surged smartly higher after the FOMC only lifted its weighted projections by a marginal 9 basis points in 2018 and 2019," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York.

"The Fed seems clearly happy to be an indulgent parent couching the rate hike in the gentlest terms possible."

Gold is highly exposed to interest rates, as rising rates lift the opportunity cost of holding non-yielding bullion.

"The wording in the statement was only marginally changed to reflect the fact that underlying inflation remains slightly below 2 percent, and that there have been signs of somewhat firmer business fixed investment in the first quarter," said Royce Mendes, director and senior economist at CIBC Capital Markets in Toronto.

Investors were also focusing on Wednesday's elections in the Netherlands, which have been boosting gold's safe-haven appeal.

Some said looming Brexit talks also added to the geopolitical risk.

Gold prices have fallen more than 5 percent since the precious metal failed to sustain a break above its 200-day moving average at around $1,261 in late February.

Silver (XAG=) rose 2.3 percent at $17.22 an ounce.

Platinum (XPT=) was up 2 percent at $951 per ounce while palladium (XPD=) was up 2.2 percent at $760, after tapping a 10-week low.

(Additional reporting by Nallur Sethuraman in Bengaluru; editing by Susan Fenton and Chizu Nomiyama)