PRECIOUS-Gold on track for biggest weekly dip in eight on Fed rate outlook

* Gold holds overnight losses, to mark 3rd straight weekly
    * Platinum group metals set for biggest weekly decline in 4
    * Dollar strength weighs on precious metals

 (Updates prices)
    By Koustav Samanta
    BENGALURU, May 20 (Reuters) - Gold steadied after two days
of losses on Friday, but was set for its biggest weekly slide in
eight weeks on the back of a firmer dollar and indications from
the U.S. Federal Reserve that it could raise interest raise
rates sooner than expected. 
    New York Fed President William Dudley said on Thursday there
was a strong sense among the central bank officials that markets
were underestimating the probability of policy tightening and
that the Fed was on track for a rate hike in June or July.
    The comments came a day after the minutes of the Fed's April
meeting revealed that most policymakers felt a rate increase
might be appropriate as early as next month. 
    Spot gold was little changed at $1,254 per ounce at
0647 GMT, near a three-week low of $1,244 reached in the
previous session. The safe-haven metal is down 1.5 percent for
the week, its biggest drop since the week ended March 25.
    "The gold environment is now substantially different from
what was apparent several weeks ago when a weaker dollar and a
benign rate environment were providing an element of support,"
INTL FCStone analyst Edward Meir said in a note.
    "This is no longer the case, as both these variables are no
longer as constructive." 
    The dollar held at its highest in nearly two months against
a basket of major currencies early on Friday, on track for a
third week of gains as investors positioned themselves for an
early rate hike. 
    Gold is highly sensitive to rising interest rates, which
increase the opportunity cost of holding it. The metal has
rallied 18 percent this year as investors bet the Fed had slowed
the pace of rate hikes. 
    Upbeat U.S. economic data on Thursday further supported
views of a rate hike next month. 
    "I don't think there will be a interest rate hike in June.
Maybe a quarter or two is required to push rates higher and the
most reasonable time will be Q4, but if they wish to push the
hike earlier, it should be in Q3," said Mark To, head of
research at Hong Kong's Wing Fung Financial Group.         
    Holding in SPDR Gold Trust, the world's largest
gold-backed exchange-traded fund, rose 0.5 percent to 860.34
tonnes on Thursday, the highest since November 2013. 
    Among other precious metals, spot silver was up 0.3
percent, at $16.53 and was headed for its biggest weekly drop
since March. 
    Spot platinum and spot palladium were on track
for their biggest weekly declines in over four months.

 (Additional reporting by Vijaykumar Vedala in Bengaluru;
Editing by Joseph Radford and Subhranshu Sahu)