Gold prices gained on Thursday as the dollar weakened after an interest rate hike by the U.S. Federal Reserve, making bullion cheaper for overseas buyers, but higher Treasury yields capped gains.

Spot gold rose 0.4% to $1,936.26 per ounce by 0805 GMT, after touching its lowest since Feb. 28 at $1,894.70 on Wednesday. U.S. gold futures rose 1.3% to $1,934.20.

The dollar index weakened, making gold less expensive for other currency holders after the U.S. central bank moved to a hawkish monetary policy in a pivot from battling the coronavirus pandemic to countering the economic risks posed by excessive inflation and the war in Ukraine.

Fed's decision lifted the U.S. 10-year Treasury yields to their highest since May 2019 in the previous session.

Greenback-priced gold is highly sensitive to rising U.S. interest rates, as they increase the opportunity cost of holding non-yielding bullion.

"The move in dollar and stocks was much more aggressive than the move in gold. And that's probably the Ukraine risks still lingering, where it's not the all-clear yet," said Ilya Spivak, a currency strategist at DailyFX. Ukrainian President Volodymyr Zelenskiy said negotiations were becoming "more realistic" and Russia said proposals under discussion were "close to an agreement".

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, rose 0.8% to its highest since March 2021 at 1,070.53 tonnes on Wednesday.

Palladium , used by automakers in catalytic converters to curb emissions, rose 2.4% to $2,465.52 per ounce.

The metal hit a record high of $3,440.76 on March 7, driven by fears of supply disruptions from top producer Russia. Spot silver climbed 0.6% to $25.22 per ounce, while platinum fell 0.1% to $1,016.44.

(Reporting by Asha Sistla in Bengaluru; Editing by Sherry Jacob-Phillips and Vinay Dwivedi)