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Gold prices climbed on Friday to their highest level in nearly three weeks, as rising bets on Federal Reserve interest rate cuts early next year pushed the dollar and bond yields lower ahead of much awaited U.S. inflation data.

Spot gold was up 0.2% at $2,049.49 per ounce, as of 0217 GMT, after hitting its highest since Dec. 4 earlier in the session. Bullion has risen 1.6% so far this week.

U.S. gold futures rose 0.5% to $2,060.80 per ounce.

"U.S. real yields have been ticking downwards because of increasing expectation for the first rate cut from Fed to come in March and that is a positive catalyst for gold prices right now," said Kelvin Wong, a senior market analyst for Asia Pacific at OANDA.

"Also, there is some safe-haven buying coming due to issues in the Red Sea."

The dollar index languished near a five-month low, making gold more attractive for other currency holders, while benchmark U.S. 10-year bond yields hovered near their lowest level since July. [US/]

Traders are now pricing in an 83% chance of a Fed rate cut by March, according to the CME FedWatch tool. Lower interest rates decrease the opportunity cost of holding non-yielding bullion.

Fed officials have been pushing back against the idea of rapid rate cuts next year, but those remarks have done little to change investor sentiment.

All eyes are now on the November core personal consumption expenditure (PCE) index report, the Fed's preferred measure of underlying inflation, due at 1330 GMT for more clarity on U.S. interest rate outlook.

Market participants expect the index to have risen 3.3% on an annual basis, compared to October's 3.5%.

Silver was steady at $24.41 per ounce, while platinum eased 0.1% to $962.13 and palladium was flat at $1,213.10. All the three metals were on track for their second consecutive weekly gain.