PRECIOUS-Gold edges up on prospects of modest Fed stimulus tapering
* Dollar index, European shares edge lower
* Focus on Fed's 2-day policy meeting that starts Tuesday
* Markets expect modest tapering of stimulus
(Updates throughout, changes dateline from SINGAPORE)
LONDON, Sept 17 (Reuters) - Gold edged higher on Tuesday as the dollar remained under pressure on prospects the Federal Reserve will announce a modest reduction in its bond-buying stimulus at its two-day meeting.
The Fed's Open Market Committee, which begins its meeting on Tuesday, is widely expected to announce it will begin curbing its $85 billion monthly bond purchases by $10 billion - a smaller reduction than previously anticipated.
Spot gold rose 0.3 percent to $1,316.89 an ounce by 0944 GMT, after falling 1.5 percent in the previous session to a five-week low of $1,303.85. U.S. gold futures for December fell $0.70 an ounce to $1,317.10.
"We are seeing that the expectations for tapering continues to be lowered and at the moment we are down in the $5-to-$10 billion bracket, which is lending some support to gold and pressuring the dollar and bond yields," Saxo Bank senior manager Ole Hansen said.
"There is no doubt that the positioning and trading activity in general is going to be light ahead of tomorrow because this is the most awaited announcement for a long time."
Hansen said a bigger-than-expected stimulus reduction could surprise the gold market, triggering losses to below $1,300 an ounce, which is now seen as a strong short-term support level.
Gold has lost 21 percent this year after the Fed signalled it would start reining in QE, which would reduce financial liquidity in the market and eventually lead to an increase in interest rates.
The dollar was lower against a basket of currencies, hovering around a four-week low hit in the previous session, while European shares fell from five-year highs seen on Monday and U.S. Treasury yields edged lower.
FED'S FUTURE POLICY STANCE ALSO IN FOCUS
With the Fed looking set to take its first step to wind down its stimulus, investors will also be focusing on the central bank's guidance on its future policy stance on Wednesday, while monitoring U.S. inflation data due at 1230 GMT on Tuesday, analysts said.
Goldman Sachs said in a note it was neutral on gold in the near term, but expected the metal to make fresh lows in 2014.
"Our U.S. economists' expectations for a 'dovish' taper and gold's recent decline will likely limit the downside to gold prices heading into the September FOMC," it said.
"We continue to expect that gold prices will resume their decline heading into 2014 when we expect economic data to solidly confirm a re-acceleration in U.S. growth and warrant a less accommodative monetary policy stance."
Holdings in New York's SPDR Gold Shares, the world's largest gold-backed exchange-traded fund (ETF), stood unchanged at 911.119 tonnes on Monday. Last week it reported outflows of 8.12 tonnes, the biggest weekly decline in its holdings since early August.
In other precious metals, spot silver rose 1.1 percent to $21.39 an ounce, after dropping by 2.3 percent in the previous session.
Spot platinum rose 0.3 percent to $1,435.70 an ounce, while spot palladium gained 0.2 percent to $702.22 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; editing by James Jukwey)