* Dollar up for third straight session
* Equities rally on U.S.-China trade optimism
* SPDR Gold holdings highest since late August
* Palladium trading at a premium to gold (Updates prices, adds graphic)
By Swati Verma
BENGALURU, Dec 12 (Reuters) - Gold firmed on Wednesday on expectations of fewer interest rate rises in the United States which partially offset the impact of a firmer dollar and a rally in stock markets on hopes of a thaw in U.S.-China trade relations.
Spot gold XAU= was up 0.1 percent at $1,243.55 per ounce at 1218 GMT. U.S. gold futures GCv1 rose 0.1 percent to $1,248.60 per ounce.
"The fact that we are seeing some risk coming back to the market: the stocks are climbing, the dollar is up and the yen is weaker, does remove some of the demand in gold. But overall, it's holding relatively well but is missing a spark to move higher," Saxo Bank analyst Ole Hansen said.
The dollar climbed for a third consecutive day as U.S. Treasury yields rose ahead of a Federal Open Market Committee (FOMC) meeting next week, while stock markets rallied as U.S. President Donald trump sounded upbeat about a trade deal with China. USD/ US/ MKTS/GLOB
"Next week's FOMC meeting is going to be the last major economic event of the year. The (gold) market has started to price in the 'one and done' interest rate scenario, and has responded quite positively to that," Hansen said.
Fed policymakers are widely expected to raise interest rates at their Dec. 18-19 meeting, but the market focus is on how many rate increases will follow in 2019.
Expectations of fewer interest rate rises is positive for gold as lower interest rates reduce the opportunity cost of holding non-yielding bullion.
Investors kept an eye out for developments around U.S.-China trade talks, and Brexit after lawmakers in Prime Minister Theresa May's Conservative party gathered enough support to trigger a no-confidence vote in her leadership.
"With the (U.S.-China) talks appearing to be going well, this could put the dollar under pressure in the coming months and support gold which now has $1,260 in its sights," said Craig Erlam, an analyst at OANDA.
"Stalled Brexit talks are taking the shine off this at the moment and supporting the dollar but should this pass then gold will continue to look bullish as it continues its hike towards $1,300."
Bullion touched its highest level in five-months at $1,250.55 earlier this week and has recovered about 8 percent from a 19-month low of $1,159.96 in mid-August.
Gold is likely to consolidate further below the 200-day moving average, around $1,255 at present, Commerzbank (DE:CBKG) analysts said in a weekly note.
Indicative of investor interest in gold, holdings of SPDR Gold Trust GLD , the world's largest gold-backed exchange-traded fund, rose to the highest since late August on Tuesday. GOL/ETF
Meanwhile, spot palladium XPD= was trading at a premium to gold, with prices of the autocatalyst metal rising about 0.5 percent to $1,249.50 an ounce. silver XAG= was up 0.8 percent at $14.64 per ounce, while platinum XPT= was also 0.8 percent higher at $787.80 per ounce.
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