By Marcy Nicholson and Pratima Desai
NEW YORK/LONDON (Reuters) - Gold fell to a near five-week low on Monday as the dollar rose after hawkish comments from a top Fed official, but uncertainty created by the start of talks on the terms of Britain's departure from the European Union prevented deeper losses.
Spot gold (XAU=) was down 0.7 percent at $1,244.85 an ounce by 2:35 p.m. EDT (1835 GMT), after falling below the 100-day moving average to $1,244.27, its lowest since May 17. U.S. gold futures (GCcv1) settled down 0.8 percent at $1,246.70.
New York Federal Reserve President William Dudley said U.S. inflation is a little low but should rise alongside wages as the labour market improves, allowing the Fed to continue gradually tightening U.S. monetary policy.
The potential for higher rates reinforced the uptrend in the dollar (.DXY), which, when it rises, makes dollar-denominated commodities more expensive for holders of other currencies, potentially weakening demand. [FRX/]
"The dollar is a large part of what's going on with gold," said ING commodities strategist Warren Patterson. "I do see some support from uncertainty about the UK government and the start of Brexit negotiations."
British Prime Minister Theresa May's failure to win a parliamentary election this month has, alongside Brexit negotiations starting on Monday in Brussels, fuelled political uncertainty.
Weighing on gold is a drop in holdings of physically backed exchange traded funds. The biggest, SPDR Gold Trust (HLDSPDRGT=XAU), saw holdings decrease by 1.5 percent last week, the biggest weekly outflow in three months. [GOL/ETF]
"The Fed continued to signal one additional hike in 2017, but the market is only pricing in a 35 percent probability of a further 25 bps increase this year," said Standard Chartered in a note, referring to the U.S. Federal Reserve's statement last week.
"The potential hikes, including their speed and magnitude, have limited gold's upside risk in our view, and expectations being scaled back bode well for prices later in the year."
Elsewhere, palladium (XPD=) was down 0.3 percent at $858.49 an ounce. Prices hovered below a 16-year high but analysts say palladium's gains of more than 25 percent so far this year may not be justified given slowing auto sales.
"There are some concerning signals from the two largest gasoline (palladium) auto markets, the U.S. and China," ICBC Standard Bank analysts said in a note.
"The pace of sales growth in both countries has slowed sharply this year."
U.S. and Chinese passenger car sales fell in May from a year earlier.
Silver (XAG=) lost 0.3 percent to $16.54 an ounce and platinum (XPT=) slid 0.6 percent to $918.55 an ounce.
(Additional reporting by Nithin Prasad and Vijaykumar Vedala in Bengaluru; Editing by Louise Heavens and James Dalgleish)