March 22 (Reuters) - Gold prices edged higher on Wednesday as the dollar eased, while investors kept a close watch on the U.S. Federal Reserve's interest rate decision and policy outlook.

 

FUNDAMENTALS

* Spot gold was up 0.2% at $1,942.96 per ounce, as of 0036 GMT. U.S. gold futures firmed 0.3% to $1,946.20.

* Gold prices dropped about 2% on Tuesday, as easing worries over a banking crisis prompted some investors to cautiously return to riskier assets.

* Investors now keenly await the Fed's rate decision due later in the day, with a 25-basis-point (bps) rate hike expected, according to the CME FedWatch tool.

* Gold is traditionally considered a hedge against inflation, but higher rates increase the opportunity cost of holding the non-yielding asset.

* The dollar index was down slightly, making bullion less expensive for buyers holding other currencies.

* Markets will also take stock of the February UK inflation data, also due on Wednesday ahead of the Bank of England's monetary policy decision on Thursday.

* U.S. Treasury Secretary Janet Yellen told bankers on Tuesday that she is prepared to intervene to protect depositors in smaller U.S. banks suffering deposit runs that threaten more contagion amid the worst financial system turmoil in more than a decade.

* SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 0.16% to 923.11 tonnes on Tuesday from 924.55 tonnes on Monday.

* Spot silver rose 0.3% to $22.43 per ounce, platinum was 0.4% higher at $972.53 and palladium gained 1% to $1,401.54.

(Reporting by Kavya Guduru in Bengaluru; Editing by Rashmi Aich)