Jan 3 (Reuters) - Gold prices edged up on Wednesday, hitting over 3-1/2-month highs, driven by a softer dollar.
* Spot gold rose 0.2 percent to $1,320.77 an ounce at 0058 GMT, having hit its highest since Sept. 15 at $1,321.33 earlier in the session.
* U.S. gold futures were up 0.5 percent at $1,322.40 an ounce.
* The dollar index fell to a more than three-month low Tuesday on expectations of a slower pace of interest rate hikes by the U.S. Federal Reserve.
* The greenback posted its biggest annual drop since 2003 in 2017, helping to lift gold to an annual increase of more than 13 percent. Bullion surged $55 an ounce in the last three weeks of 2017 alone.
* Gold is highly sensitive to rising U.S. interest rates because it increases the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
* Technical analysts warned that gold's rally is looking overdone in the short-term.
* Key factors for the bullion market this year will be how quickly central banks normalize interest rates, how much further the equities rally goes, the longer-term impact of U.S. tax reforms, and when inflation will pick up, Mitsubishi analyst Jonathan Butler said.
* Spot palladium jumped to a record high on Tuesday at $1,096.50 on fears of short supplies after soaring 57 percent in 2017. It was last up 0.2 percent at $1,094 an ounce early Wednesday.
* Holdings of SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, fell 0.14 percent to 836.32 tonnes on Tuesday from 837.50 tonnes on Friday.
* India's gold imports surged 67 percent in 2017 from the previous year to 855 tonnes as jewelers replenished inventory amid a rebound in retail demand, provisional data from precious metals consultancy GFMS showed.
* Spot gold may break a resistance at $1,326 per ounce and rise towards the next resistance at $1,380 in three months, as suggested by its wave pattern and a Fibonacci ratio analysis, according to Reuters technical analyst Wang Tao.
* Asian stocks struck a fresh decade high on Wednesday as risk appetites were whetted by a bevy of upbeat manufacturing surveys that confirmed a synchronized upturn in world growth was well under way.
(Reporting by Nallur Sethuraman in Bengaluru; editing by Richard Pullin)