PRECIOUS-Gold steadies above two-week low ahead of U.S. inflation

* U.S. consumer inflation data due at 1230 GMT

* Strong reading seen boosting chance of U.S. rate rise

* GRAPHIC-2017 asset returns: http://tmsnrt.rs/2jvdmXl

(Updates throughout, adds LONDON dateline) LONDON, Sept 14 (Reuters) - Gold steadied after hitting a two-week low on Thursday as the dollar softened ahead of U.S. consumer inflation data which will be closely watched for clues about the likely pace of Federal Reserve interest rate increases. The U.S. currency was down 0.1 percent against a basket of currencies in early trade, having posted its biggest one-day rise in six weeks on Wednesday.

Spot gold was at $1,322.80 an ounce at 0940 GMT,

little changed from $1,322.85 late on Wednesday but above an earlier low of $1,318.75, its weakest since Sept. l.

U.S. gold futures for December delivery were down

$1.30 at $1,326.70. With near record short positions in the dollar, any signs that U.S. inflation is picking up could support the case for another rate rise and send the dollar significantly higher, analysts said. "We still expect the Fed to hike rates in December, which the market doesn't. That is part of our bullish view on the dollar and in turn our more cautious view on gold," Julius Baer analyst Carsten Menke said. The Fed has a 2 percent inflation target, and a series of subdued inflation readings have dampened expectations for further rate rises in the near term. Although in the longer run a more inflationary environment could support gold demand, both a stronger dollar and higher rates would probably weigh on the metal in the near term. "Any uptick in U.S. inflation would be driven by a tightening labour market and a solid economic backdrop, and should be accompanied by rising interest rates by the Fed," Menke said. "This shouldn't have a positive impact on gold." Spot prices hit their highest in more than a year last week at $1,357.54 an ounce on the back of a softer dollar and concerns over North Korea's nuclear ambitions, which knocked stocks sharply lower. Equities, which have since recovered, retreated again on Thursday ahead of the U.S. inflation numbers, and after weaker than expected Chinese fixed-asset investment, factory output and retail sales data - taking some pressure off gold. Trading volumes in the metal were largely thin in Asia overnight, MKS said in a note, as traders awaited the U.S. inflation report. "As we have become accustomed to seeing in recent days, bullion was broadly supported by underlying interest out of China, however unable to make any further headway higher," it said.

Silver was down 0.2 percent at $17.70 an ounce, while platinum was unchanged at $977.25 an ounce and palladium

was 0.2 percent higher at $938.70.

(Additional reporting by Apeksha Nair in Bengaluru; editing by David Clarke)