* Stronger U.S. dollar caps gains
* China gold prices slip to discount to London
* Spot palladium hits fresh 16-month low (Updates prices, adds comment)
By Chris Prentice and Clara Denina
NEW YORK/LONDON, June 19 (Reuters) - Gold held near a three-week high on Friday and was set for a second weekly gain, bolstered by the U.S. Federal Reserve’s caution on an interest rate rise and worries over Greece, even as a recovering dollar capped gains.
Spot gold was up 0.05 percent at $1,201.50 an ounce by 2:09 EDT (1809 GMT) in choppy, thin trade after notching its biggest daily increase since mid-May on Thursday.
Prices are up 1.8 percent this week, the biggest weekly increase in over a month.
“We’re sandwiched between resistance at the 200-day moving average and support at the 100-day moving average,” said Howard Wen, precious metals analyst at HSBC Securities in New York.
Gold rallied on Thursday on a softer dollar after Fed policymakers said a rate increase would be appropriate only after further improvement in the labor market and greater confidence that inflation would rise.
“The boost that gold got from a more dovish Fed this week slightly improves the technical picture,” ActivTrades chief analyst Carlo Alberto de Casa said.
U.S. gold futures for August delivery settled little changed at $1,201.90 an ounce, near Thursday’s almost four-week high.
Noninterest-paying gold has benefited from a record-low rate environment following the 2007-2009 financial crisis. Higher rates would increase the opportunity cost of holding the metal.
Gold in euro terms was trading around 9 percent lower than a near two-year peak hit in January.
Bullion has garnered some support from investors worried over a euro zone crisis. Athens and its international creditors remained deadlocked over a debt deal. Euro zone leaders will hold an emergency summit on Monday to try to avert a Greek default after bank withdrawals accelerated.
Investor positioning remained bearish, with assets of top gold-backed exchange traded fund SPDR Gold Trust at its lowest since 2008 and speculators increasing short positions.
Asian physical demand was also sluggish as a tight price range and higher stock market yields kept consumers away.
In China, prices on the Shanghai Gold Exchange fell to a discount of up to $2 an ounce to the global price from a premium of between $1 and $2 on Thursday.
Silver was down 0.4 percent at $16.09 an ounce, while palladium lost 1.9 percent to $705.25 after hitting a 16-month low.
Platinum was up 0.1 percent at $1,082.24. (Reporting by Chris Prentice in New York and Clara Denina in London; Editing by David Holmes, David Evans and Jeffrey Benkoe)