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Gold prices edged higher on Tuesday as the dollar crept lower, although bets of another big interest rate hike from the U.S. Federal Reserve weighed on the non-yielding metal's appeal and capped its gains.

Spot gold was up 0.4% at $1,655.66 per ounce by 1235 GMT, while U.S. gold futures were down 0.2% to $1,660.70.

"Any gain (in gold) is temporary, until the market anticipates the Fed to slow down its tightening pace," said Giovanni Staunovo, a commodity analyst at UBS.

While a weaker dollar helped gold on Tuesday, bullion prices are expected to hit $1,600 by the end of the year with elevated U.S. inflation and the Fed still pursuing an aggressive monetary policy tightening, Staunovo said.

The dollar index fell to a 1-1/2-week low as the pound jumped following the UK's dramatic U-turn on the tax-slashing mini budget that had rattled global markets.

Gold prices have fallen nearly 10% so far this year, as consecutive U.S. rate hikes boosted bond yields and the dollar, while increasing the opportunity cost of holding gold, which is otherwise seen as an inflation hedge.

Further, another 75-basis-point Fed rate hike is expected next month after red-hot inflation data for September.

"Investment and retail demand has been muted and there is no major trigger that can take prices above $1,700 in the near term... There are still concerns related to the interest rate hikes," said Jigar Trivedi, a senior analyst at Mumbai-based Reliance Securities. [GOL/ETF] [GOL/AS]

Meanwhile, UK's blue-chip and mid-cap indexes hit their highest levels in more than a week, lifted by a historic reversal of the government's unfunded tax cut plans and earnings optimism that boosted Wall Street indexes overnight.

Spot silver rose 0.6% to $18.79 per ounce, platinum was up 0.3% at $918.63, and palladium gained 1.1% to $2,021.25.