* Gold could rise along with yields in coming months -analyst
* Palladium hits 1-year peak
(Updates prices)
By Nakul Iyer
March 16 (Reuters) - Gold edged lower on Tuesday, pressured by a stronger dollar, as investors awaited policy cues from a two-day U.S. Federal Reserve meeting.
Spot gold XAU= dropped 0.2% to $1,729.01 per ounce by 1:57 p.m. EDT (1757 GMT). U.S. gold futures GCv1 settled up 0.1% at $1,730.90.
"Gold should have found a bottom but the big risk is the Fed, and if the Fed does not push back against the bond market, you could see that one day of panic selling (in gold)," said Edward Moya, senior market analyst at OANDA.
The U.S. Federal Open Market Committee's two-day meeting ends on Wednesday.
The central bank is expected to reiterate its pledge to keep interest rates pinned near zero until the economy reaches full employment. dollar .DXY edged up 0.1%, increasing the cost of holding gold in other currencies. USD/
Gold could rise with U.S. Treasury yields in the next few months, as a move closer to 2% in yields could derail relentless stock market buying and restore gold's appeal as a safe haven, Moya added.
While gold is considered a hedge against inflation, higher U.S. Treasury yields have dulled non-interest-bearing bullion's appeal.
"The near-term technical outlook is very bearish and that's inviting professional traders to short the (gold) market ... It could take some sort of a geopolitical spark to turn this market around," said Kitco Metals senior analyst Jim Wyckoff.
Palladium XPD= jumped 4.4% to $2,493.25 an ounce, after earlier scaling a one-year high of $2,520.31.
Given that a palladium shortage is likely in 2021, and above-ground inventories are at their lowest levels since 2003, any shortfall will have a big impact on prices, UBS said in a note. Norilsk Nickel, the world's largest palladium producer, on Tuesday trimmed its 2021 production estimates, citing complications with two Siberian mines. XAG= fell 1.5% to $25.87 an ounce and platinum XPT= eased 0.3% to $1,208.59.