Gold cuts gains after Fed as dollar rises

By Frank Tang

NEW YORK (Reuters) - Gold futures traded higher on Wednesday, but initial gains fizzled as the dollar strengthened after the U.S. Federal Reserve said that inflation will remain subdued for some time.

The Fed's comments about low inflation risk could dampen gold's appeal as a hedge against upward spiral in prices. Bullion investors have been looking for more clarity from the closely watched Fed's policy statement.

"I would say it is neutral to maybe slightly positive (to gold), only in a sense that the Fed eliminated the deflation threat, so that was no longer an issue," said Bill O'Neill, managing partner of New Jersey-based LOGIC Advisors.

Concluding a two-day meeting, the U.S. central bank said it had decided to hold overnight interest rates in a zero to 0.25 percent range -- the level reached in December -- and repeated that they would likely stay unusually low for some time.

"This was a Fed statement that really has little surprise and little change," he said.

The dollar extended its gains against the euro after the Fed announcement. The strength of the U.S. currency has sent gold prices reeling from a three-month high of $989 per ounce in early June.

U.S. August futures settled up $10.10, or 1.1 percent, at $934.40 an ounce on the COMEX division of the New York Mercantile Exchange.

Spot gold briefly spiked to $942.20 in London and was at $929 by 3:15 p.m. EDT, against its previous finish of $925.15.

The dollar had a bumpy ride on Wednesday. Earlier in the session, it rose against major currencies .DXY on talk that the Swiss National Bank was intervening on currency markets to weaken the franc. Gains were cut after U.S. durable goods data came in stronger than forecasts.

Overall, market watchers said that over the long term the dollar is facing pressure on expectations that the U.S. Federal Reserve would not be in a hurry to tighten monetary policy, an outcome that would benefit gold.

INFLATION WORRIES RECEDE

While appearing more comfortable on deflation risks in their latest statement, policy-makers made clear inflation was not yet a concern.

"The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the committee expects that inflation will remain subdued for some time," the Fed said.

Worries that heavy government borrowing could boost inflation receded on Wednesday after the International Monetary Fund said the recent rebound in oil prices had been largely driven by speculators, driving oil lower.

"There was a feeling that the Fed would have to tighten (rates) a lot sooner, but investors are perhaps reassessing their view of the timing of rate increases," said Robin Bhar, an analyst at Calyon. "And that, of course, would help gold."