* Spot gold seen testing support at $1,261 - technicals
* SPDR Gold holdings rise 0.3 pct Thursday
* Palladium touches over 3-month lows (Adds comment, updates prices)
By Sethuraman N R
Oct 21 (Reuters) - Gold fell slightly on Friday as the dollar strengthened, but was on track for its first weekly gain in four weeks on steady physical buying from China and exchange-traded funds.
Spot gold XAU= was down 0.2 percent at $1,263.36 an ounce at 0656 GMT. It was headed for a weekly gain of 1 percent.
U.S. gold futures GCcv1 fell 0.2 percent to $1,264.40.
"Gold is well supported at $1,250 and everyone is waiting for the elections and the prices are just moving according to the dollar," said Yuichi Ikemizu, head of commodity trading at Standard Bank in Tokyo.
An interest rate hike by the U.S. Federal Reserve has been already factored in the prices, Ikemizu said.
"Even if they raise rates gold will not go down steeply."
Fed policymakers have heavily tipped that the central bank will raise U.S. rates in December.
The dollar index .DXY , which measures the greenback against a basket of currencies, was up 0.2 percent at 98.505. It touched a new seven-month high of 98.564 on Friday.
Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding assets such as bullion, while boosting the dollar, in which it is priced.
Meanwhile, the European Central Bank on Thursday left interest rates unchanged, maintaining the parameters of its 1.74 trillion euro ($1.95 trillion) asset buying scheme. rates tend to support gold, though that is often offset by a weaker euro EUR= . The single currency fell to its lowest since March against the dollar on Friday.
Data on Thursday appeared to indicate an improving U.S. economy that would support a rate hike later this year. Home resales surged in September after two straight months of declines.
Other data showed a bigger-than-expected increase in the number of Americans filing for unemployment benefits last week, but the trend continued to suggest that the labour market remains strong. continue to see exchange-traded fund (ETF) inflows support the metal (gold), however dollar strength is likely to weigh upon moves higher over the short term amid euro and pound weakness," MKS PAMP Group trader Sam Laughlin said.
Holdings of the SPDR Gold Trust GLD , the world's largest gold-backed ETF, rose 0.31 percent to 970.18 tonnes on Thursday. SPDR holdings have risen 2.3 percent so far this month. GOL/ETF
"ETFs adding new positions show the investment demand for gold and this could probably prevent gold going below $1,250," Standard Bank's Ikemizu said.
Spot silver XAG= fell 0.2 percent to $17.48.
Platinum XPT= was down 0.4 percent at $930.60. Palladium XPD= fell as much as over 1 percent to touch a low of $621.50, its worst since July 13.