PRECIOUS-Gold steady edges up as dollar dips, but looming U.S rate hike caps gains


* Palladium heads for first monthly decline since December

* Silver falls after hitting one-month high on Tuesday

(Recasts, updates prices) LONDON, May 31 (Reuters) - Gold edged higher on Wednesday as the dollar dipped and simmering geopolitical tensions lent support, though the metal was heading for its first monthly drop since December amid an increased chance of a U.S. interest rate rise next month. The dollar dipped versus a currency basket, with sterling recovering after a poll showed the Britain's ruling Conservative party still in the lead, overriding a previous projection of a hung parliament in elections next week. Still the dollar's losses were limited given U.S. consumer spending and inflation data published on Tuesday which pointed to improved domestic demand that should allow the Federal Reserve to raise interest rates next month. Higher rates reduce demand for non-interest bearing bullion and boost the U.S. dollar, making dollar-priced gold costlier for non-U.S. investors. "The market has been over-enthusiastic in terms of the weakness (seen in gold). Once the rate hike happens, people will focus on political uncertainty and on the physical support (for gold)," said Hamza Khan, head of commodities strategy at ING. "Fundamentally we favour the upside. We see prices at $1,350 (an ounce) for the third quarter, and $1,250 for the second quarter."

Spot gold edged up 0.2 percent to $1,264.81 per ounce

at 1346 GMT. It closed 0.3 percent lower on Tuesday after rising to a one-month high of $1,270.47. For the month, bullion is down 0.2 percent.

U.S. gold futures were up 0.2 percent at $1,264.50.

Traders see an 86.6 percent chance of a quarter-point rate hike at the Fed's June meeting, Thomson Reuters data shows. But some market participants say signs of softness in some economic data have raised questions about whether the Fed can hike interest rates two more times this year and begin shrinking its balance sheet. Another factor raising questions about rate hikes this year is the investigations into President Donald Trump's ties with Russia, which investors fear will hamper his administration's progress on tax cuts and other promised stimulus measures. "Precious metals remain supported on the back of a weaker dollar overnight. The range is likely to hold ahead of Fridays (U.S.) employment numbers," KITCO METALS INC said in a note.

In other precious metals, silver slipped 0.4 percent

to $17.29 an ounce though was 0.4 percent higher for the month.

Platinum was up 0.9 percent at $939.74 an ounce after

falling 1.9 percent in the previous session in its biggest one-day percentage loss in nearly a month.

Palladium was up 0.8 percent at $811.75 an ounce and

on track for a monthly decline of 1.3 percent, its first monthly drop this year.

(Additional reporting by Vijaykumar Vedala in Bengaluru; editing by David Clarke and David Evans)