By Jan Harvey
LONDON (Reuters) - Gold steadied above an earlier two-week low on Thursday as the dollar softened despite strong U.S. consumer inflation data, which could allow further interest rate increases from the Federal Reserve.
The U.S. currency was down 0.2 percent against a basket of currencies, having posted its biggest one-day rise in six weeks on Wednesday.
The dollar was weaker even though data showed U.S. consumer prices accelerated in August amid a jump in the cost of gasoline and rental accommodation, signs of firming inflation that could allow further monetary policy tightening.
Spot gold was up 0.2 percent at $1,324.86 an ounce at 1340 GMT, above an earlier low of $1,315.71, its weakest since Aug. 31.
U.S. gold futures for December delivery added 0.02 percent to $1,328.20.
With short positioning in the dollar near record levels, any signs that U.S. inflation is picking up could support the case for another rate increase and send the U.S. currency significantly higher, analysts said.
"We still expect the Fed to hike rates in December, which the market doesn't. That is part of our bullish view on the dollar and in turn our more cautious view on gold," Julius Baer analyst Carsten Menke said.
The Fed has a 2 percent inflation target, and a series of subdued inflation readings have dampened expectations for further rate rises in the near term.
Although in the longer run a more inflationary environment could support gold demand, both a stronger dollar and higher rates would probably weigh on the metal in the near term.
"Any uptick in U.S. inflation would be driven by a tightening labour market and a solid economic backdrop, and should be accompanied by rising interest rates by the Fed," Menke said. "This shouldn't have a positive impact on gold."
Spot prices hit their highest in more than a year last week at $1,357.54 an ounce on the back of a softer dollar and concerns over North Korea's nuclear ambitions, which knocked stocks sharply lower.
Equities, which have since recovered, retreated again on Thursday ahead of the U.S. inflation numbers, and after weaker than expected Chinese fixed-asset investment, factory output and retail sales data - taking some pressure off gold.
Trading volumes in the metal were largely thin in Asia overnight, MKS said in a note, as traders awaited the U.S. inflation report.
"As we have become accustomed to seeing in recent days, bullion was broadly supported by underlying interest out of China, however unable to make any further headway higher," it said.
Silver was down 0.2 percent at $17.69 an ounce, while platinum was up 0.5 percent at $982.30 an ounce and palladium was 0.7 percent lower at $930.50.
(Additional reporting by Eric Onstad in London and Apeksha Nair in Bengaluru; Editing by David Clarke and Mark Potter)