* Prices up more than 2 pct this week on Fed caution
* Platinum snaps 7 weeks of losses with 3.3 pct rise
* GRAPHIC-2016 asset returns: http://reut.rs/1WAiOSC (Recasts, updates prices; adds comment, second byline, NEW YORK dateline)
By Marcy Nicholson and Jan Harvey
NEW YORK/LONDON, Sept 23 (Reuters) - Gold steadied in a lackluster session as the U.S. dollar also flattened on Friday, but bullion stayed on track for its biggest weekly gain in nearly two months after the Federal Reserve sounded a cautious note on the pace of interest rate hikes.
The Fed signaled an increasingly careful approach to future rate increases after a policy meeting on Wednesday, reassuring investors who had feared the U.S. central bank could move more quickly to tighten monetary policy. is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
Spot gold XAU= was up 0.03 percent at $1,337.01 an ounce by 2:57 p.m. EDT (1857 GMT), down from a two-week high reached Thursday at $1,343.64, and was more than 2 percent higher on the week, its best weekly performance since late July.
U.S. gold futures GCv1 for December delivery settled down 0.2 percent at $1,341.70 per ounce.
"There was some unwinding of the expectations that there was a small probability (the Fed) would hike after Jackson Hole," said Josh Crumb, chief strategy officer at Goldmoney, referring to interest rates and discussions around them at an international gathering of central bankers in Jackson Hole, Wyoming, last month.
"The market has written off raising rates a couple days ahead of the (U.S.) election in November, but everyone's waiting for the next sign: whether they're adamant about December."
The Fed's next meeting is set for Nov. 1-2, ahead of the U.S. presidential election on Nov. 8. FED/DIARY
Gold has been boosted by the Fed moving in a more dovish direction, ABN Amro analyst Georgette Boele said.
"But in the end everyone realizes that (a December hike) will likely happen, so it is too dangerous to push gold prices above the previous peak for now," she added.
Stock markets, despite some weakness on Friday, were also on course for their biggest weekly gain in two months. The dollar .DXY steadied against a basket of major currencies. MKTS/GLOB
Silver XAG= was down 1.2 percent at $19.60 an ounce, but still on track for a 4.4 percent rise, the most since the week ending July 1.
Palladium XPD= was up 1.3 percent at $702.30, and on track to finish the week up 4.6 percent, its strongest since late July and the biggest gainer this week among the main precious metals. Platinum XPT= was down 0.4 percent at $1,047.50 an ounce. On a weekly basis, it was up 3.3 percent, snapping seven straight weeks of losses.
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