Gold inches up on softer dollar as investors assess Fed rate outlook

By Sukanya Mitra

Oct 20 (Reuters) - Gold inched higher on Tuesday, helped by a softer US dollar, as market participants looked ahead to next week's Federal Reserve policy meeting for clues on the future path of interest rates.

Spot gold was up 0.1% at $4,145.22 per ounce by 0347 GMT, while US gold futures for December delivery rose 0.1% to $4,164.70.

"The interesting dynamic is that there's going to be a big move, no matter what the Fed does, and the initial reaction... might be supportive of gold if they keep interest rates unchanged," said Kyle Rodda, senior financial market analyst at Capital.com.

Recent comments from Fed officials signalling little urgency for further policy tightening have tempered expectations of a rate hike at the central bank's October 27-28 policy meeting.

According to CME's FedWatch Tool, traders are pricing in an 82% chance that the Fed will leave rates unchanged next week, but expectations for a hike in December remain at 89%.

Higher interest rates typically weigh on gold prices because they increase the opportunity cost of holding bullion, which does not pay interest.

The US dollar index .DXY softened on Tuesday, making greenback-priced bullion more affordable for buyers overseas. USD/

Rodda said a de-escalation of tensions in the Middle East and a decline in oil prices could provide a further boost to gold prices.

Oil prices advanced on Tuesday, with Brent hovering around a five-month high as traders priced in a geopolitical risk premium after Yemen's Iran-aligned Houthis said on Monday they carried out several attacks against Saudi energy, airport and military targets. O/R

Elsewhere, Bank of Japan Governor Kazuo Ueda said underlying inflation is "quite close" to the central bank's 2% target, with strong global AI demand adding to inflationary pressure from a tight job market, signalling scope for further rate increases.

Among other metals, spot silver rose 0.7% to $57.48 per ounce, platinum gained 0.7% to $1,651.25 and palladium fell 0.2% to $1,117.87.