* Upside in gold capped by strong U.S. economic data - Macquarie
* Trade war fears simmer, underpinning dollar
* Palladium hits highest since late January (Recasts, updates prices)
By Maytaal Angel
LONDON, Sept 25 (Reuters) - Gold edged up on Tuesday as the dollar drifted ahead of a U.S. Federal Reserve meeting, but the precious metal’s upside remains capped by strong U.S. economic data that continues to underpin the greenback.
The dollar fell versus a basket of major currencies, with an expected Federal Reserve rate rise mostly priced in by traders, who will be looking for clues on the future pace of rate hikes from the central bank.
“Upside scenarios (for gold are if) the Fed sounds a bit more dovish, but there’s not a lot of room for that at the moment. U.S. data hasn’t weakened and market positioning for rate hikes is not excessively hawkish compared to the Fed,” said Macquarie commodity strategist Matthew Turner.
“In general, market dynamics are quite weak for gold.”
A strong dollar makes dollar-priced gold costlier for non-U.S. investors, while rising U.S. interest rates typically deter investors from buying a non-yielding asset such as gold.
Spot gold was up 0.2 percent to $1,201.39 an ounce at 1410 GMT. U.S. gold futures were up 0.1 percent at $1,206.10 an ounce.
Gold has fallen around 12 percent since in April, hit by rising U.S. interest rates and a global trade war that threatens growth and has led investors to chose the dollar as a safe haven rather than gold.
A senior Chinese official said on Tuesday it was difficult to proceed with trade talks with the United States while Washington was putting “a knife to China’s neck”, a day after both sides heaped fresh tariffs on each other’s goods.
“If lingering trade war fears or renewed emerging market jitters sour sentiment, the U.S. dollar may reclaim a haven bid, making gold vulnerable,” said Ilya Spivak, a currency strategist for Dailyfx.
In wider markets, European shares and Wall Street got a lift as oil’s move above $80 a barrel boosted energy equities. Oil’s rise will fan inflation and growth concerns in many countries, and could in the long run benefit gold
Silver was up 1.5 percent at $14.48 an ounce, having hit its highest since early September.
Spot palladium rose 0.3 percent to $1,062.47 after hitting its highest since late January.
Platinum was flat at $827.70 an ounce. (Additional reporting by Nallur Sethuraman in Bengaluru; Editing by Louise Heavens and Mark Potter)