Aug 28 (Reuters) - Gold held firm near its three-week peak on Thursday, as the dollar softened and investors hunkered down for Friday's U.S. inflation data for cues on the Federal Reserve's policy path.
Spot gold was up 0.3% at $3,405.68 per ounce at 1149 GMT, after hitting $3,407.57, its highest level since August 8, earlier in the session.
U.S. December gold futures rose 0.4% to $3,463.90.
The dollar index (.DXY), was down 0.3% against a currency basket, making gold more attractive for holders of other currencies.
Investors are awaiting Friday's release of the Personal Consumption Expenditures (PCE) Price Index, which is the Fed's preferred inflation measure. Economists polled by Reuters expect the index (USPCEY=ECI), opens new tab to rise 2.6% in July, matching the June figure.
"A surprise to the upside would likely strengthen the dollar and increase Treasury yields, weighing on gold prices," said Ricardo Evangelista, senior analyst at ActivTrades.
"The opposite outcome could fuel expectations of a more dovish Fed, softening the dollar and supporting the precious metal."Markets ex
pect a more than 87% chance of a 25-basis-point rate cut at the Fed's policy meeting next month, according to CME FedWatch Tool.
Non-yielding gold typically performs well in a low-interest-rate environment.
New York Fed Bank President John Williams said on Wednesday that interest rates could fall at some point, but policymakers will need to gauge upcoming data.
Traders are also watching U.S. President Donald Trump's moves to assert control over the Fed. Earlier this week, Trump said he was firing Fed Governor Lisa Cook.
"Many see the dispute as a threat to the Fed's independence and credibility, which is supportive for the precious metal," said Evangelista.
Elsewhere, spot silver was up 1% at $39 per ounce, platinum lost 0.4% to $1,342.51 and palladium climbed 0.2% to $1,093.51.
Reporting by Ishaan Arora in Bengaluru, additional reporting by Anmol Choubey; Editing by Harikrishnan Nair and Tomasz Janowski
