* Gold has bounced 4 pct from 5-1/2-year low
* Weak yuan may prompt Fed to be more gradual in rate hike pace -CMC
* Coming up: U.S. retail sales at 1230 GMT (Adds Q2 gold demand, updates prices)
By Manolo Serapio Jr
MANILA, Aug 13 (Reuters) - Gold edged lower on Thursday as the dollar firmed, but the metal remained near a three-week peak as a weaker Chinese yuan raised doubts about the pace of expected interest rate hikes by the U.S. central bank.
Investors have been betting that the Federal Reserve could raise interest rates at its next policy meeting in September amid a recovering U.S. economy and job market, but investors are factoring in the impact of China's surprise currency devaluation.
"There's a feeling that the devaluation of the yuan may have a tendency to make the Fed more cautious about its monetary tightening," said Ric Spooner, chief market analyst at CMC Markets in Sydney.
"While it may not stop the first one, it may very well make them even more gradual in the pace at which they increase rates and that would be because of potentially lower inflation being transmitted by a weaker yuan to international markets."
Spot gold XAU= was off 0.4 percent at $1,120.80 an ounce by 0635 GMT, after earlier peaking at $1,126.31, its loftiest since July 20. The dollar gained 0.3 percent versus a basket of currencies .DXY .
Bullion has recovered 4 percent from a 5-1/2-year low of $1,077 touched in a late July selloff that was fueled by concerns over a looming hike in U.S. interest rates.
U.S. gold for December delivery GCcv1 slipped 0.3 percent to $1,120.40 an ounce.
China's yuan fell for a third day on Thursday but the central bank said there is no basis for further depreciation in the yuan currency given strong economic fundamentals. ID:nB9N0Z405D
Still, sources told Reuters that there was some support within the Chinese government for a devaluation of perhaps up to 10 percent to help struggling exporters. ID:nL3N10M4Q4
An adjustment to China's currency is probably appropriate if the Chinese economy is weaker than authorities there expected, New York Fed President William Dudley said in the U.S. central bank's first public response to the devaluation of the yuan. ID:nL1N10N0ZS
Gold demand hit a six-year low in the second quarter, a World Gold Council report showed, as sluggish prices and the prospect of better returns in equities curbed interest in the metal. ID:nL5N10N3OI
SPDR Gold Trust GLD , the world's largest gold-backed exchange-traded fund, said its holdings rose 0.6 percent to 21.6 million ounces on Wednesday, the first increase in days after falling to the lowest since September 2008. GOL/ETF
Spot palladium XPD= dropped 0.4 percent to $620.25 an ounce after hitting a two-week high of $627 earlier. Platinum XPT= was steady at $995.25 an ounce and silver XAG= fell 0.5 percent to $15.41 per ounce.