By Jan Harvey
LONDON: Gold rose on Tuesday as the dollar slipped ahead of a two-day Federal Reserve policy meeting this week, which will be closely watched for clues on the outlook for U.S. interest rates.
The Fed is expected to leave policy unchanged at its meeting starting later in the day, but investors are watching for any signs that the U.S. central bank may move back to tightening later this year.
Spot gold was up 0.4 percent at $1,320.01 an ounce at 1135 GMT, while U.S. gold futures for August delivery were up 80 cents an ounce at $1,320.30.
"Looking at Fed funds futures, no one is really expecting a move this week, but what the meeting may do is give us more of a clue as to what might happen in September, and perhaps in November and December," Mitsubishi analyst Jonathan Butler said.
"It does still look like there could be a rate rise before the end of the year," he said. "That is consistent with the improving economic situation, particularly the strong employment data for June, and there are also sighs that inflation is starting to pick up as well."
Gold is highly sensitive to rising U.S. interest rates, which lift the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
A scaling back of expectations for further increases in U.S. interest rates, which rose for the first time in nearly a decade in December, has helped push gold up 24 percent this year.
The dollar fell a quarter of a percent against a currency basket, largely due to a bounce in the yen after traders dialled back expectations of how much new stimulus Japanese authorities will inject into an ailing economy.