By Jan Harvey
LONDON (Reuters) - Gold edged higher on Monday as the dollar retreated on the back of lacklustre U.S. wages data, but moves were muted ahead of an expected interest rate hike from the U.S. Federal Reserve this week.
Spot gold was up 0.2 percent at $1,249.47 an ounce at 1235 GMT, while U.S. gold futures for February delivery were up $3.60 an ounce at $1,252.00. Spot prices fell 2.5 percent last week, their biggest weekly drop since May.
The Fed is widely tipped to lift rates at its two-day policy meeting ending Wednesday, but its accompanying statement will be closely watched for any surprises.
The bank is expected to increase rates another two or three times in 2018, but still-sluggish inflation and wage growth has raised question marks over that view.
"The FOMC's policy statement, Fed Chair Yellen's final press conference in charge, and the update to the summary of economic projections will be closely parsed for signs the Fed's longer term intentions," Mitsubishi analyst Jonathan Butler said.
"Though we expect few major changes to Fed policy until new Fed Chair Powell takes office, dovish language or any caution on the future pace of interest rate hikes... would give some support to gold by weakening the dollar and lowering Treasury yields."
Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
On the wider markets, world stocks rose and equity volatility neared a record low on Monday ahead of a raft of central bank rate decisions, while newly launched bitcoin futures shot above $18,000.
Hedge funds and money managers sharply reduced their net long positions in COMEX gold and silver contracts in the week to Dec. 5, U.S. data showed on Friday.
Net positions in silver fell by the largest amount on record, by 34,915 contracts, Societe Generale said in a note.
"The market is left with little speculative ammunition to pull prices lower on the short term," it said. "Fundamentals on the other hand remain a headwind on longer horizons. With silver prices highly correlated to gold's, the December rate hike, along with the three further 2018 hikes our economists expect, will weigh on investors' appetite."
Silver was down 0.2 percent at $15.81 an ounce.
Platinum was up 0.1 percent at $888.80 an ounce, after touching its lowest since February 2016 last week. Palladium was 0.5 percent higher at $1,011.50 an ounce.
(Additional reporting by Apeksha Nair in Bengaluru, editing by Louise Heavens)