PRECIOUS-Gold hovers above $1,200 on weaker dollar as trade tensions ease

* Gold breaks above $1,200

* U.S. dollar weakens on easing trade tensions

* Palladium close to one-month high

* GRAPHIC-2018 asset returns: (Updates prices, headline; adds comment, second byline, NEW YORK to dateline)

NEW YORK/LONDON, Aug 27 (Reuters) - Gold gained above $1,200 per ounce on Monday as the dollar weakened after the United States and Mexico struck an agreement that lowers trade tensions.

Major currencies gained against the U.S. dollar, which has been a safe haven from months of trade tensions.

Spot gold gained 0.3 percent at $1,208.92 per ounce by 1:37 p.m. EDT (1737 GMT), earlier peaking at $1,212.38, a two-week high. U.S. gold futures for December delivery settled up $2.70, or 0.2 percent, at $1,216 per ounce.

The dollar index slid against a basket of six major currencies.

A weaker greenback makes dollar-denominated gold cheaper for holders of other currencies, which could boost bullion demand and prices.

“The NAFTA agreement is helping the (platinum group metals) a little bit. The PGMs seem to be pulling on gold and silver, too,” said Walter Pehowich, executive vice president of investment services at Dillon Gage Metals.

The United States and Mexico agreed to overhaul the North American Free Trade Agreement (NAFTA), putting pressure on Canada to agree to the new terms on auto trade and other issues to remain part of the three-nation pact. An agreement could ease concerns about an escalation in global trade tensions.

But prices remained capped as higher rates, even if they come at a gradual pace, raise the opportunity cost of holding gold, which can be costly to store and insure.

“Our reading is that we still expect two more hikes this year and that should be the important thing near term for gold ... next year the Fed is still likely to continue hiking,” said Danske Bank senior analyst Jens Pedersen.

Gains in the Chinese yuan on Monday made gold cheaper for buyers in the world’s biggest gold consumer, providing some support for prices.

If prices hold at $1,200 an ounce, there is a good chance of further gains, with a target of $1,230/$1,235, said ActivTrades chief analyst Carlo Alberto De Casa.

Below $1,200, the bearish trend could recover strength, with a first targeted support area at $1,180, he added.

Higher activity in gold options amid geopolitical tensions and a record-long bull market for U.S. equities suggest that investors are betting gold prices have found a floor, traders said.

Meanwhile, spot silver gained 0.4 percent at $14.86 per ounce. Earlier it hit $14.92, its highest since Aug. 15.

Platinum increased 1.3 percent at $800.90 per ounce, earlier reaching close to a two-week high at $805.30. Palladium gained 1.1 percent at $946.40 per ounce, earlier hitting $949.75, its highest since July 14. (Additional reporting by Vijaykumar Vedala in Bengaluru Editing by Sunil Nair, Kirsten Donovan, Jane Merriman and Adrian Croft)