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Gold hits 2-wk high as Fed rate outlook weighs on dollar

Gold bars are stacked at a safe deposit room of the ProAurum gold house in Munich March 6, 2014. REUTERS/Michael Dalder (Reuters)

By Sethuraman N R (Reuters) - Gold prices hit a two-week high on Monday as the dollar slumped to near 6-week lows after the U.S. Federal Reserve's dovish outlook on the pace of rate increases this year continued to disappoint dollar bulls. Spot gold rose 0.5 percent to $1,234.60 per ounce by 0735 GMT, after earlier touching $1,235.50 an ounce, its highest since March 6. U.S. gold futures gained 0.3 percent to $1,234.10. The dollar index, which measures the greenback against a basket of currencies, was down 0.3 percent at 100.040, after hitting a low of 100.020, its worst since Feb. 7. Gold prices have rebounded more than $35 from its low hit before the policy decision to boost rates last Wednesday, while the dollar has fallen 1.7 percent from its high of 101.71 hit the same day. Fed Chair Janet Yellen's cautious guidance last week has investors pricing in almost no chance of another rate rise at the next policy meeting in May, and is seen rising to around 50-50 for June. [FEDWATCH] "The market was geared for a hawkish FOMC and the Fed was really dovish. There was a lot of short-covering. People are now putting gold back on the plate and are more comfortable," a Hong Kong-based precious metals trader said. "The dollar is weaker across the board ... It's pushing gold higher ... a pure technical buying." Spot gold fell in the week to March 14 on firm expectations that the Fed would hike rates and as the dollar strengthened, but prices reversed, prompting traders to cover their short positions. Money managers slashed their net long positions in gold by 44,058 lots to 49,835 lots during that week, the lowest since early January. Managed short positions rose by nearly 10,000 lots to 70,454. "With concerns of a more hawkish Fed now easing, the outlook for gold looks a little bit more positive," ANZ analysts said in a note. Markets are also looking ahead for a packed week of Fed messaging, with no less than nine different policy makers set to speak, including Chair Janet Yellen on Thursday. Spot gold is expected to test a resistance at $1,237 per ounce, a break above which could lead to a gain to $1,243, Reuters technical analyst Wang Tao said. Holdings of SPDR Gold, the world's largest gold-backed exchange-traded fund, fell 0.35 percent to 834.10 tonnes on Friday. Spot silver rose 0.4 percent to $17.39 per ounce. Platinum was up 0.4 percent at $961.50, while palladium rose 0.1 percent to $773. (Reporting By Nallur Sethuraman in Bengaluru; Editing by Richard Pullin and Biju Dwarakanath)