LONDON, Aug 7: Gold eased on Tuesday ahead of the US Federal Reserve's policy meeting later in the day, with investors watching the currency market for clearer direction.

Trading volumes remained low in the holiday period, exposing the metal to sharp price fluctuations, analysts said.

We would expect gold to recover towards $672-$675 an ounce in the short-term, but we don't exclude a short travel to $668 before we move back higher, said Frederic Panizzutti, metals analyst at MKS Finance.

But overall it's a pretty quiet market due to holidays and the dollar is going to be the key factor in the coming days, he added.

He said that anything affecting the currency should be considered as an important factor and the Fed meeting is definitely something that could affect the dollar's value.

Spot gold inched down to $669.30/669.90 an ounce by 0941 GMT from $671.05/671.65 late in New York on Monday, when it rose to a one-week high of $676.50.

The dollar was locked in narrow ranges against other major currencies as investors awaited the Fed meeting for any comment on risks to growth from widening US credit market problems.

Monday's 2 per cent rally in US stocks helped ease investor worries about a credit squeeze, but analysts were still expecting the US central bank to acknowledge recent turbulence after a widely-expected decision to leave rates on hold later.

Traditionally gold is seen as a hedge against financial and political turmoil, but in recent months it has followed stock and credit markets as investors trimmed their portfolios.

A higher US currency makes dollar-denominated metals more expensive for holders in other currencies, while investors often buy gold as a hedge against oil-led inflation.—Reuters