Gold rises as soft US economic data spurs Fed rate cut bets

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Dollar slips to three-week low

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US factory activity slips for a second month in May, ISM says

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Benchmark U.S. Treasury yields drop to 2-week low

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Palladium up more than 1%

(Recasts after U.S. economic data, adds graphic and updates prices)

By Brijesh Patel

June 3 (Reuters) - Gold prices rose on Monday as weaker-than-expected U.S. economic data cemented expectations that the Federal Reserve would cut interest rates later this year, sending the dollar and bond yields lower.

Spot gold was up 0.9% at $2,348.06 per ounce as of 12:42 p.m. ET (1642 GMT), after posting a 2% gain last month. Prices hit an all-time high of $2,449.89 on May 20.

U.S. gold futures rose about 1% to $2,368.60 per ounce.

"We've had a bit of a pullback, we'd prefer to call it a consolidation. But again, the underpinning positive bias really comes from strong expectation that we are moving towards a interest rate cuts at some point later this year," said David Meger, director of alternative investments and trading at High Ridge Futures.

Data showed U.S. manufacturing activity slowed for a second straight month in May, and U.S. construction spending fell unexpectedly for a second consecutive month in April on declines in non-residential activity.

The dollar fell to a three-week low against its rivals, making gold more attractive for other currency holders, while Benchmark U.S. Treasury yields fell to a two-week low after soft manufacturing data.

Data on Friday showed that the U.S. inflation had stabilised in April, suggesting the U.S. central bank's interest rate cut plans later this year remained intact.

Traders are currently pricing in about a 59% chance of a Fed rate cut in September, according to CME FedWatch tool. Lower interest rates cut the opportunity cost of holding nonyielding bullion.

Meanwhile, The European Central Bank is seen almost certain to trim rates by a quarter point to 3.75% on Thursday, which could make it the first major central bank to cut rates this cycle.

Investors now look forward to Wednesday's ADP employment report, and U.S. non-farm payrolls data due on Friday.

Elsewhere, spot silver gained 0.8% to $30.62 per ounce, platinum slipped 1.7% to $1,020.30, and palladium gained 1.1% to $922.75.

(Reporting by Brijesh Patel and Harshit Verma in Bengaluru; Editing by Ravi Prakash Kumar and Hugh Lawson)