London: Gold hit a three-month low on Wednesday as the dollar index held near its highest in more than a year, underpinned by expectations that the Federal Reserve may be set to signal a rise in interest rates.

Spot gold hit its weakest since early June at $1,246.79 an ounce and was down 0.5 per cent at $1,248.74 an ounce at 1323 GMT. US gold futures for December delivery were up $1.20 at $1,249.70, off a low of $1,246.40.

The dollar index held near Tuesday’s 14-month high on Wednesday, up 0.1 per cent against a basket of currencies.

“The dollar is a major headwind for the gold price,” Commerzbank analyst Daniel Briesemann said. “Our forex colleagues are of the opinion that the dollar will appreciate further, so that clearly gives even more of a headwind.” “Once we drop out of the current trading range, below around $1,240, that may lead to technical follow-up selling,” he added.

“That will probably lead to even lower gold prices.” The dollar has been trending higher since early July, supported by talk of a possible Fed rate rise.

That would likely hurt gold, due both to the impact on the dollar, in which it is priced, and because it would lift the opportunity cost of holding non-yielding bullion.

“Next week, we have the FOMC meeting and no doubt we will see some choppy price action in anticipation of the next move from the Fed,” Mitsubishi precious metals analyst Jonathan Butler said.

“If predictions are to be believed, the Fed is going to outline not only its timetable for ending quantitative easing, but also the potential for a rise in interest rates in the first half of next year,” he said. “Some pricing in of that may result in further gold weakness.”

Ukraine tensions abate

Gold prices rose in the first half of the year after plunging 28 per cent in 2013, but weakness in the current quarter has cut the gain since end-December to just 4 per cent.

The metal had been underpinned by the tension between Russia and the West over Ukraine, but signs the conflict may be stabilising has undermined that support.

A Kremlin adviser said on Wednesday that the Russian and Ukrainian presidents, Vladimir Putin and Petro Poroshenko, are broadly satisfied with how a ceasefire between Kiev and pro-Russian forces is holding in eastern Ukraine.

Prices took little support from demand for physical metal in Asia, the leading market for gold, dealers said.

In India, the second-largest gold buyer, Trade Minister Nirmala Sitharaman said the government is not considering an immediate cut in gold import duty.

New Delhi hiked the import duty on gold last year to 10 per cent to trim its bloated current account deficit. A dramatic improvement in the deficit had fuelled talk of a duty cut.

Among other precious metals, silver was down 0.3 per cent at $18.97 an ounce. Spot platinum was up 0.1 per cent at $1,380.75 an ounce and spot palladium was down 0.2 per cent at $854.75 an ounce.

Platinum fell to its lowest since early February at $1,374.70 an ounce, while palladium hit a one-month low of $849 an ounce, having fallen 2.3 per cent on Tuesday.

The metal, which hit a 13-1/2 year high of $910 an ounce earlier this month, has come under pressure as concerns over a potential escalation of the situation in Ukraine abate. Russia is the world’s number one producer of palladium.