PRECIOUS-Gold prices set for first weekly gain since September

* Higher demand to help gold end week higher
    * SPDR Gold holdings rise 0.3 pct Thursday
    * Palladium touches more than three-month lows

 (Updates prices, adds quote)
    By Zandi Shabalala
    ISTANBUL, Oct 21 (Reuters) - Gold barely budged on Friday as
rising demand from Asia was offset by a strong dollar but the
precious metal remained on track for its first weekly rise since
the week ending Sept. 30.
    Gold has been hurt in recent weeks by the strength of the
dollar, which has been helped by a slew of data indicating an
improvement in the U.S. economy that could justify an interest
rate rise later this year.
    Higher U.S. rates increases the opportunity cost of holding
non-yielding assets such as bullion and creates a flight to
investments that may offer higher returns.
    Spot gold steadied at $1,266.21 an ounce at 1408 GMT
but was headed for a weekly gain of more than 1 percent, clawing
back part of the 6.5 percent shed over the last three weeks.
    U.S. gold futures were flat at $1,267.
    Gold demand from Asia, including China, India and
exchange-traded funds (ETF), has helped prop up prices this
    "There is accelerating physical gold demand in Asia and
particularly in India which has helped prices," Commerzbank
commodity analyst Carsten Fritsch said, adding that Indian
demand had improved after lacklustre sales last year.
    However, the dollar index, which measures the
greenback against a basket of currencies, was up 0.35 percent at
98.658 after touching its highest since February on Friday.
    "The market right now, and for the rest of the year, is
still focused on the U.S. interest rate hike. We mostly know its
likely to happen but we are looking at the economic signals
ahead of it," Natixis precious metals analyst Bernard Dahdah
    Holdings of the SPDR Gold Trust, the world's largest
gold-backed ETF, rose 0.31 percent to 970.18 tonnes on Thursday.
SPDR holdings have risen 2.3 percent so far this month.
    MKS PAMP Group said in a note that ETF inflows continued to
support gold. "However, dollar strength is likely to weigh upon
moves higher over the short term amid euro and pound weakness."
    The euro hit a seven-month low against the dollar after the
European Central Bank poured water on a tapering of its asset
buying programme, keeping the door open for more stimulus this
    Silver fell 0.1 percent to $17.49 while platinum
 barely changed at $933. Palladium fell 0.9 percent
to $623.70 after dipping to its lowest point since July 13.

 (Additional reporting by Nallur Sethuraman in Bengaluru;
editing by Mark Heinrich and David Clarke)