PRECIOUS-Gold heads for weekly loss as stronger dollar, Fed rate outlook weighs

Updates prices

By Ashitha Shivaprasad

Sept 25 (Reuters) - Gold prices eased on Friday and were set to post a weekly loss, pressured by a stronger dollar and growing expectations that the Federal Reserve will keep interest rates elevated to contain inflation.

Spot gold XAU= fell 0.2% to $4,270.83 per ounce by 0425 GMT, but was down over 2% so far this week. US gold futures GCcv1 edged 0.2% higher to $4,305.10.

The dollar was headed for a weekly gain, making greenback-priced metals more expensive for holders of other currencies, while US Treasury yields extended gains. USD/ US/

"Focus will definitely continue to be on the interest rate situation. When we start to see markets pricing in a much more hawkish Fed, it strengthens the dollar and is negative for gold," said Kelvin Wong, senior market analyst at OANDA.

Expectations of higher-for-longer US interest rates firmed after two Fed policymakers said additional hikes may be needed to curb unacceptably high inflation, following last week's quarter-point increase in the benchmark rate.

"Returning inflation to 2% is a top priority, and I will support the policy path that gets us there while carefully weighing risks to the labour market along the way," Philadelphia Fed President Anna Paulson said. New York Fed President John Williams also suggested tighter monetary policy is coming.

Markets are currently pricing in a nearly 69% probability of a US rate hike in October, according to CME's FedWatch Tool.

Although gold is traditionally seen as a hedge against inflation, higher rates can curb its demand by increasing the appeal of yield-bearing assets.

"I remain very positive on gold for the rest of the year. Ongoing geopolitical friction and mounting sovereign debt are driving constant demand for safe-haven assets," said Joshua Rotbart, founder of J. Rotbart & Co.

Spot silver XAG= slipped 0.5% to $63.59 per ounce, platinum XPT= lost 0.1% to $1,746.36 and palladium XPD= fell 1.9% to $1,249.71. All three metals were poised for weekly losses.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Sherry Jacob-Phillips and Subhranshu Sahu)

((Ashitha.Shivaprasad@thomsonreuters.com;))