Gold steadies in thin trading as US debt deal weighs

By Seher Dareen

(Reuters) - Gold prices hovered near two-month lows in holiday-thinned trading on Monday as the U.S. debt ceiling agreement eased investor worries, while chances of the Federal Reserve raising rates dampened the demand for bullion.

Spot gold was mostly unchanged at $1,946.28 per ounce by 9:51 a.m. EDT (1351 GMT), while U.S. gold futures inched up 0.1% to $1,945.50.

The news from Washington of a debt deal, which still has to pass through Congress, came on a low-volume day with the United States and parts of Europe, including Britain, on holiday. [MKTS/GLOB]

"Until a couple of days ago, a majority of investors were betting that the Federal Reserve was remaining steady with rates and would not raise them in the coming month," said Carlo Alberto De Casa, external analyst at Kinesis Money.

Last week's economic data changed that view, with the Fed now expected to raise rates at its June 13-14 meeting. Fed Fund futures showed a 59.4% chance of a 25-basis-points increase, with rates peaking in July at 5.318%.

"With a possible June rate hike by the Fed still in play, it is the greenback and U.S. treasury yields which continue to prosper," said Tim Waterer, chief market analyst at KCM Trade, in a note.

Gold, which offers no yield of its own, tends to fall out of favour with investors when interest rates rise.

The dollar index was near its two-month peak, weighing on gold prices. A stronger dollar makes bullion more expensive for holders of other currencies. [USD/]

"As long as we remain above $1,900, I don't see too much risk of further decline," De Casa said, adding there could be a small margin for decline.

Spot silver fell 0.5% to $23.20 per ounce, platinum was up 0.4% to $1,026.59, while palladium was mostly flat at $1,423.17.

(Reporting by Seher Dareen in Bengaluru; Additional reporting by Kavya Guduru; Editing by Sohini Goswami and Andrea Ricci)