* Upside in gold capped by strong U.S. economic data - Macquarie
* Trade war fears simmer, upderpinning dollar
* Palladium hits highest since late February
By Maytaal Angel
LONDON, Sept 25 (Reuters) - Gold steadied on Tuesday as the dollar held firm ahead of a U.S. Federal Reserve meeting, with the precious metal's upside capped by strong U.S. economic data that continues to underpin the greenback.
The dollar index held above last week's two months lows, with an expected Federal Reserve rate rise mostly priced in by traders, who will be looking for clues to the future direction of rate hikes from the central bank.
"Upside scenarios (for gold is if) the Fed sounds a bit more dovish, but there's not a lot of room for that at the moment. U.S. data hasn't weakened and market positioning for rate hikes is not excessively hawkish compared to the Fed," said Macquarie commodity strategist Matthew Turner.
"In general, market dynamics are quite weak for gold."
A strong dollar makes dollar-priced gold costlier for non-U.S. investors, while rising U.S. interest rates typically deter investors from buying a non-yielding asset such as gold.
Spot gold XAU= edged up 0.1 percent to $1,200.08 an ounce by 1016 GMT.
U.S. gold futures GCcv1 were little changed at $1,204.50 an ounce.
Gold has fallen more than 12 percent since in April, marred by rising U.S. interest rates and a global trade war that has led investors to chose the dollar as a safe haven rather than gold.
China and the United States imposed a new round of tariffs on each other's goods that took effect on Monday, intensifying a trade dispute that is expected to hit global growth. lingering trade war fears or renewed emerging market jitters sour sentiment, the U.S. dollar may reclaim a haven bid, making gold vulnerable," said Ilya Spivak, a currency strategist for Dailyfx.
Silver XAG= was up 0.4 percent at $14.28 an ounce.
Spot palladium XPD= dipped 0.1 percent to $1,058.50 after hitting its highest since late February at $1,061.80.
Platinum XPT= rose 0.9 percent to $829.98 an ounce.