* Fed’s two-day meeting on U.S. monetary policy begins on Tuesday
* Palladium jumps more than 1% after sharp decline on Monday
* Dollar eyes biggest daily pct decline in over three weeks
* Gold on track for its third consecutive monthly decline (Updates prices)
By K. Sathya Narayanan
April 30 (Reuters) - Gold prices firmed on Tuesday as the dollar slipped to a one-week low, making bullion more attractive, with investors awaiting the Federal Reserve’s interest rate decision this week to gauge the outlook for U.S. monetary policy.
Spot gold rose 0.3 percent to $1,283.66 per ounce as of 2:59 p.m. EDT (1859 GMT). U.S. gold futures settled up 0.3 percent at $1,285.70 an ounce.
However, the metal was down about 0.6 percent so far this month, on track for its third consecutive monthly decline.
“The dollar index backed off and is seeing some significant loss today after hitting a two-year high last Friday and that is supporting the metals market,” said Jim Wyckoff, senior analyst with Kitco metals.
The dollar index, which tracks the greenback against major currencies, fell to its lowest level since April 23.
The U.S. currency is down 0.4 percent, which could be its biggest daily percentage decline in more than three weeks.
Investors are looking to the Federal Reserve’s two-day policy meeting for clues on the outlook for U.S. interest rates. A decision on rates will be announced on Wednesday.
The U.S. central bank last month abandoned expectations of any rate hikes this year.
“The Fed meeting could be interesting because if they say there is no change in their position or their dovish language gold could move a bit higher,” said INTL FCStone analyst Edward Meir.
“But if they tweak their language a bit ... then gold could come under pressure as dollar would go up in that case. Everyone is on hold till” Wednesday, he added.
Interest rate futures traders are currently pricing in a 61 percent chance of an interest rate cut by December, according to the CME Group’s FedWatch Tool.
“We continue to expect gold prices to consolidate lower, to average $1,285 per ounce in second quarter before recovering to average $1,325 per ounce in the fourth quarter, despite the market once again pricing in a rising probability of a Fed rate cut this year,” analysts at Standard Chartered wrote in a note.
Lower interest rates decrease the opportunity cost of holding nonyielding bullion and weigh on the dollar, making gold cheaper for investors holding other currencies.
The yellow metal, often seen as an alternative investment during times of political and financial uncertainty, earlier rose as much as 0.5 percent after disappointing factory activity data from China decreased investor appetite for higher-risk assets.
In other precious metals, silver gained about 0.4 percent to $14.96 per ounce, but was on track for its third straight monthly percentage decline.
Platinum fell about 1 percent to $885, but was up over 4-1/2 percent so far this month.
Palladium jumped 1.2 percent to $1,387.01 an ounce, after touching its lowest level in nearly two weeks at $1,354 earlier in the session. The metal slumped more than 6 percent on Monday. (Reporting by K. Sathya Narayanan and Swati Verma in Bengaluru Editing by G Crosse and Matthew Lewis)