* Dollar starts 2018 on back foot, still boosting gold
* Spot gold chart shows overbought conditions-technicals
* Palladium hits record after 56 pct rally in 2017
(Updates prices, comment; adds byline, NEW YORK dateline)
By Chris Prentice and Jan Harvey
NEW YORK/LONDON, Jan 2 (Reuters) - Gold extended its rally into the new year on Tuesday, touching late September highs on a softer U.S. dollar, while spot palladium jumped to a record on fears of short supplies after soaring 57 percent in 2017.
Spot gold was up 1 percent at $1,315.11 per ounce at 2:36 p.m. EST (1936 GMT) after hitting $1,315.46, the highest since Sept. 20, 2017. Gold has risen each trading session since Dec. 15.
U.S. gold futures for February delivery settled up $6.80, or 0.52 percent, at $1,316.10 per ounce.
The dollar index fell to a more than three-month low on expectations of a slower pace of interest rate hikes by the U.S. Federal Reserve. The greenback posted its biggest annual drop since 2003 in 2017, helping to lift gold to an annual increase of more than 13 percent. Bullion surged $55 an ounce in the last three weeks of 2017 alone.
Global markets received a boost on Tuesday from gains in U.S. equities and surprisingly upbeat Chinese manufacturing data. "(Gold's) rally has been part and parcel with the weaker dollar," said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle.
"The tax plan seems to have changed the tenor and trend of the market," he added, referring to the Republican tax overhaul expected to balloon the U.S. budget deficit.
Technical analysts warned that gold's rally is looking overdone.
Key factors for the bullion market this year will be how quickly central banks normalize interest rates, how much further the equities rally goes, the longer-term impact of U.S. tax reforms, and when inflation will pick up, Mitsubishi analyst Jonathan Butler said.
Gold is highly sensitive to rising U.S. interest rates because it increases the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
Palladium jumped 3.12 percent to $1,094.10 per ounce.Prices rose to $1,096.50, surpassing a previous record set in January 2001. Palladium was the stand-out performer among major precious metals last year, jumping 57 percent to hit a series of multiyear highs.
"Palladium continues to rally on real demand and supply tightness," Miguel Perez-Santalla, vice president of Heraeus Metal Management in New York, said in a market note.
Among other precious metals, spot silver was up 1.4 percent at $17.184. Platinum was 1.70 percent higher at $941.50 per ounce.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic: Gold at technically overbought level ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>(Additional reporting by Nallur Sethuraman in Bengaluru; editing by Jason Neely, Adrian Croft and Jeffrey Benkoe)
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