* Dollar pares losses on strong U.S. service sector data
* Markets have largely priced in Fed rate hike in December (Updates prices, adds comment, adds NEW YORK to dateline)
By Renita D. Young and Maytaal Angel
NEW YORK/LONDON, Oct 4 (Reuters) - Gold pared gains on Wednesday as the U.S. dollar came off its lows on strong data from the U.S. service sector index. touched its lowest since mid-August on Tuesday, spot gold XAU= was up 0.2 percent at $1,274.41 per ounce by 2:25 p.m. EDT (1825 GMT). Earlier on Wednesday, it reached a high of $1,282 per ounce.
U.S. gold futures GCcv1 for December delivery settled up $2.20, or 0.2 percent, at $1,276.80 per ounce.
"We had a number of days of decline in a row, and once we had some dollar softness, there was an excuse for gold to rally a little," said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle.
A weaker dollar makes dollar-priced gold cheaper for non-U.S. investors.
Investors would be listening closely to comments by Fed Chair Janet Yellen later Wednesday at a Federal Reserve Bank of St. Louis event, for more hints about possible U.S. interest rate increases through 2018, Haworth added.
The greenback eased against a currency basket .DXY after a Politico report said Fed Governor Jerome Powell was favored by U.S. Treasury Secretary Steven Mnuchin as the new Fed chair over former governor Kevin Warsh. Yellen's term expires in February.
Powell is seen as more dovish than Warsh, who has criticized the Fed's bond-buying program in the past. FRX/
Dollar money market futures were pricing in about a 70 percent chance of a rate hike by December, but a more dovish Fed candidate would likely prompt investors to bet on a slower retreat from the current loose monetary policy.
The U.S. dollar pared its losses after data showed a service sector index increasing to its highest level in more than 12 years. equities hit a fresh intra-day high, helped by signs of strong economic growth worldwide, boosting the likelihood that the Fed will raise rates at its December meeting. MKTS/GLOB
Soaring equities tend to dent the appeal of gold, seen as a safe haven.
"We still feel comfortable with our cautious view on gold as the rebound of the dollar should continue while the slide in (gold) prices increases the risk of further position squaring in the futures market and could trigger selling in the physical market," said Julius Baer in a note.
Silver XAG= dipped 0.04 percent at $16.59 an ounce.
Platinum XPT= rose 0.7 percent at $913.70 an ounce, while palladium XPD= climbed 1.1 percent at $925.40 per ounce. The sister metals, widely used as autocatalysts, hit price parity for the first time in 16 years last week.
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