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Gold prices firmed overnight as the US dollar slipped to a one-week low, making bullion more attractive, with investors awaiting the Federal Reserve’s interest rate decision this week to gauge the outlook for US monetary policy.

Spot gold rose 0.3 per cent to $US1,283.66 per ounce.

US gold futures settled up 0.3 per cent at $US1,285.70 an ounce.

However, the metal was down about 0.6 per cent so far this month, on track for its third consecutive monthly decline.

“The (US) dollar index backed off and is seeing some significant loss today after hitting a two-year high last Friday and that is supporting the metals market,” said Jim Wyckoff, senior analyst with Kitco metals.

The US dollar index, which tracks the greenback against major currencies, fell to its lowest level since April 23.

The US currency is down 0.4 per cent, which could be its biggest daily percentage decline in more than three weeks.

Investors are looking to the Federal Reserve’s two-day policy meeting for clues on the outlook for US interest rates.

A decision on rates will be announced on Wednesday.

The US central bank last month abandoned expectations of any rate hikes this year.

“The Fed meeting could be interesting because if they say there is no change in their position or their dovish language, gold could move a bit higher,” said INTL FCStone analyst Edward Meir.

“But if they tweak their language a bit … then gold could come under pressure as (the US) dollar would go up in that case. Everyone is on hold till” Wednesday, he added.

Interest rate futures traders are currently pricing in a 61 per cent chance of an interest rate cut by December, according to the CME Group’s FedWatch Tool.

“We continue to expect gold prices to consolidate lower, to average $US1,285 per ounce in second quarter before recovering to average $US1,325 per ounce in the fourth quarter, despite the market once again pricing in a rising probability of a Fed rate cut this year,” analysts at Standard Chartered wrote in a note.

Lower interest rates decrease the opportunity cost of holding non-yielding bullion and weigh on the US dollar, making gold cheaper for investors holding other currencies.

The yellow metal, often seen as an alternative investment during times of political and financial uncertainty, earlier rose as much as 0.5 per cent after disappointing factory activity data from China decreased investor appetite for higher-risk assets.

In other precious metals, silver gained about 0.4 per cent to $US14.96 per ounce, but was on track for its third straight monthly percentage decline.

Platinum fell about one per cent to $US885, but was up over 4-1/2 per cent so far this month.

Palladium jumped 1.2 per cent to $US1,387.01 an ounce, after touching its lowest level in nearly two weeks at $US1,354 earlier in the session.

The metal slumped more than six per cent on Monday.