PRECIOUS-Gold lower but heading for weekly gain after Fed rate outlook

* Gold up 0.4 percent for the week

* Dollar steadies above 5-month low

* Silver hits highest in almost five months (Updates prices, adds comment, second byline, NEW YORK dateline)

NEW YORK/LONDON, March 18 (Reuters) - Gold edged lower on Friday, as the dollar steadied above a five-month low, but the metal remained on track for a weekly gain after the Federal Reserve scaled back rate increase expectations.

Spot gold was down 0.31 percent at $1,253.99 an ounce by 2:52 p.m. EST (1852 GMT), while U.S. gold futures settled 0.8 percent lower at $1,254.3 an ounce. Spot gold was up around 0.4 percent on the week.

“Since the Fed statement, gold’s been backing off the highs,” said Phillip Streible, senior commodities broker at R.J. O’Brien in Chicago.

“The way we would see this rally build is if you saw more statements like one from ECB. We continue to see countries dig deeper in the red.”

The dollar rose 0.3 percent against a basket of major currencies but was still near a 17-month low against the yen and set to end the week 1.2 percent lower against the currency basket.

The U.S. central bank held interest rates steady on Wednesday and indicated it would tighten policy this year, but fresh projections offered by the Fed showed policymakers expect two quarter-point increases by year-end, half the number forecast in December.

Expectations the Fed would raise rates steadily this year had faded since the bank’s initial hike in December, as concerns about global growth roiled financial markets.

A low interest rate environment tends to decrease the opportunity cost of holding non-yielding bullion.

Silver rose more than 1 percent to $16.13, the highest since late October, before falling 0.43 percent to $15.81. It was up 2.2 percent on the week.

“We saw the added interest moving into silver and that could be due to the fact that gold is up 18 percent this year and although investors are still looking for upside potential, they are also starting to look for relative value,” Saxo Bank senior manager Ole Hansen said.

“You can argue the fundamentals in silver potentially improving over the year, with supply being reduced from the mining of other metals.”

Holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose 1.50 percent to 807.09 tonnes on Thursday from 795.20 tonnes on Wednesday.

Platinum fell 1.22 percent to $972.40 and palladium eased 0.6 percent to $592.50. (Additional reporting by Naveen Thukral in Singapore; Editing by Keith Weir and Mark Potter)