* Markets to watch ECB policy meeting on Thursday
* GRAPHIC-2016 asset returns: http://reut.rs/1WAiOSC (Updates prices, adds comment)
By Clara Denina
LONDON, Oct 19 (Reuters) - Gold hit a two-week high on Wednesday as the dollar weakened amid uncertainty over the timing of a U.S. interest rate increase.
Spot gold XAU= gained 0.6 percent to $1,269.56 an ounce at 1357 GMT, after earlier touching its highest since Oct. 5 at $1,272.17. U.S. gold futures GCcv1 rose $8.30 to $1,271.10 an ounce.
Spot prices had shed about 7 percent over the past three weeks, as markets re-priced the likelihood of a Federal Reserve's rate hike in December.
"Technically, gold is well supported above $1,250 an ounce ... today's push in the $1,270 area is a positive signal ahead of the U.S. elections and the possible Fed rate hike in December," ActivTrades chief analyst Carlo Alberto De Casa said.
The metal is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding assets.
The dollar was down 0.1 percent against a basket of six main currencies, even as data on Wednesday showed that U.S. single-family starts surged in September, pointing to sustained housing market strength. A drop in the construction of multifamily dwellings, however, pushed overall home building activity to a 1-1/2-year low.
Fed fund futures 0#FF: imply around a 65 percent probability of the Federal Reserve raising interest rates by December, down from 70 percent. The change was seen after U.S. consumer prices data on Tuesday showed a moderation in underlying inflation.
"The market is keeping an eye on the potential rate hike in December, which we don't expect because once we get close to the meeting, the Fed will see that key figures are not doing well enough to justify another rate hike and there will be some support for gold," said Danske Bank senior analyst Jens Pedersen.
A European Central Bank's policy meeting on Thursday will also be monitored by markets, Pedersen said.
Spot silver XAG= was up 0.1 percent at $17.61 an ounce.
Platinum XPT= rose 0.1 percent to $941 an ounce and palladium XPD= gained lost 0.2 percent to $637.50 an ounce.
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