By Marcy Nicholson and Pratima Desai
NEW YORK/LONDON (Reuters) - Gold rose on Friday, climbing above the prior session's 10-1/2 month low, as the dollar and U.S. stocks dipped at the end of a volatile week highlighted by the Federal Reserve's signal that there could be more rate hikes than previously expected in 2017.
Spot gold (XAU=) was up 0.6 percent at $1,135.16 an ounce by 2:30 p.m. EST (1930 GMT). The metal hit $1,122.35 on Thursday, its weakest since Feb. 2 and is down 2 percent so far this week, leaving it on track for its sixth consecutive weekly loss.
U.S. gold futures (GCcv1) settled up 0.7 percent at $1,137.40.
Gold prices rose to session highs after U.S. officials told Reuters that a Chinese warship had seized an underwater drone deployed by a U.S. oceanographic vessel in the South China Sea.
"It gave gold a little bit of a boost but it was a knee jerk spike. It looks like both sides are trying to tweak each other, if you will," said Bill O'Neill, co-founder of LOGIC Advisors.
"Today's something of a consolidation day across the board."
The dollar (.DXY) fell from the 14-year high against a basket of currencies reached on Thursday when markets repositioned for a more hawkish U.S. central bank.
"The rate hike this week from the Fed and the hawkish outlook for next year leave a fairly negative picture for gold," ING commodity strategist Warren Patterson said.
Higher interest rates next year could propel the U.S. currency higher, making gold more expensive for non-U.S. firms.
"The nature of recent gold selling implies fresh shorting as well as liquidation," HSBC analyst James Steel said in a note.
"The selling may not yet be exhausted."
Highlighting investors' lack of appetite for gold are physically backed gold exchange traded funds; holdings of the SPDR Gold Trust (GLD), the world's largest gold ETF, are down more than 10 percent since Nov. 9.
Silver (XAG=) gained 0.6 percent at $16.05 an ounce, after falling more than 5 percent on Thursday.
Platinum (XPT=) rallied 3.50 percent to $924.80, after dropping to the lowest since early February in the previous session.
Palladium (XPD=) was down 1.5 percent at $689.50 after falling to a one-month low at $677.25. It is on track to end the week down more than 5 percent.
"We would refrain from buying (platinum or palladium) at this point in time," Julius Baer analyst Carsten Menke said in a note. "We have become more cautious on the demand backdrop, primarily related to autocatalysts and jewelry."
(Additional reporting by Swati Verma and Nallur Sethuraman in Bengaluru; Editing by Adrian Croft and Tom Brown)