Spot gold was bid at $1,192.10 an ounce at 1445 GMT, against $1,200.00 late in New York on Monday. U.S. gold futures for December delivery fell $8.40 an ounce to $1,194.20.
The Federal Open Market Committee releases its decision on interest rates and issues a policy statement at 1815 GMT after a one-day meeting.
Market watchers are awaiting any signal that would suggest further monetary easing, and for a reiteration that interest rates will stay low for an extended period.
That would be gold supportive. It cuts the opportunity cost of investing in gold, said Citigroup analyst David Thurtell. More monetary stimulus, more liquidity should be favorable for gold as well, he added.
The euro extended losses to trade more than 1 percent lower against the dollar as the greenback was boosted by a growing view that the Fed is unlikely to unveil any aggressive measures to further loosen monetary policy.
Strength in the U.S. unit curbs gold's appeal as an alternative asset and makes dollar-priced commodities more expensive for non-U.S. investors.
Speculation has emerged in recent days that the Fed may take new measures to extend its quantitative easing program, such as reinvesting funds to maintain its balance sheet.
Any signs of further quantitative easing are likely to be negative for the dollar, and positive for gold, analysts said.
HSBC pointed out in a note that while further quantitative easing was seen to be on the table for the United States, the euro zone appeared to be backing away from QE, while Japan had avoided implementing such measures.
The United States looks like it may increase the money supply while other central banks do not -- this should weaken the U.S. dollar, it said.
If the traditional inverse dollar-gold relationship, which broke down with the onslaught of sovereign risk crisis, is reemerging, then this should be positive for gold prices.
INDIAN BUYING TRICKLES IN
Gold's retreat from last week's three-week highs resulted in a slight improvement in Asian physical demand.
Traders bought more metal in India, the world's largest gold consumer, as prices eased below $1,200 an ounce, but interest was limited by a weaker rupee, which makes the dollar-quoted asset more expensive for local buyers.
Among other precious metals, silver was at $18.06 an ounce versus $18.29, platinum was at $1,532.50 an ounce versus $1,540 and palladium was at $473 versus $475.
The platinum-gold ratio -- a measure of how many ounces of gold are needed to buy an ounce of platinum -- eased to a 2-1/2 week low of 1.28, showing gold was becoming increasingly expensive compared to platinum.
In a monthly report, ScotiaMocatta said a mixed picture for car sales, redemptions in platinum- and palladium-backed exchange-traded funds and a softer technical picture all pointed to a softer outlook for the platinum group metals.
Overall we expect further consolidation in the PGMs, and in the short term expect prices to pull back to retest support, it said.
(Additional reporting/graphic by Amanda Cooper; Editing by Sue Thomas)