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Silver posts best day since 2008 on Monday

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U.S. 10-year bond yields slip to near 2-week low

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Dollar down 0.3% against rivals

Oct 4 (Reuters) - Gold extended gains on Tuesday to firm above the key $1,700 per ounce level on a retreat in the dollar and U.S. Treasury yields as investors expected the Federal Reserve to tone down its pace of monetary tightening.

Spot gold was up 0.3% at $1,703.79 per ounce as of 1149 GMT, having touched its highest since Sept. 13 at $1,710.49 earlier in the session.

U.S. gold futures rose 0.6% to $1,712.70.

"Bad news is good news for gold now. Basically, if we get worse economic data from the U.S., then the market will believe we're closer to a peak in rates," said Ole Hansen, head of commodity strategy at Saxo Bank.

"Gold is not out of the woods yet, but at least we've seen a very strong rebound. The first move has been driven by short covering."

Gold started the quarter on a solid note, registering on Monday its biggest daily percentage gain since March as a slowdown in U.S. manufacturing activity raised hopes that the Fed might be less aggressive going forward.

U.S. 10-year Treasury yields fell to a near two-week low, while the dollar index extended its decline, making gold cheaper for other currency holders.

"Investors have started to price in a less aggressive Fed, with the revised expectations reflected by greater demand for treasuries, lower yields, and the corresponding weakening of the greenback," Ricardo Evangelista, senior analyst at ActivTrades, said in a note.

The Fed has raised rates aggressively since March and Fed officials have noted more rate hikes are needed to tame inflation.

Focus now shifts to U.S. non-farm payrolls data due on Friday that could offer more clarity on Fed policy tightening.

Spot silver eased 0.1% to $20.73 per ounce, having earlier hit a peak since June 29. Prices jumped more than 9% in the previous session to record the best day in 14 years.

Platinum gained 0.9% to $910.15 per ounce and palladium climbed 2.8% to $2,283.05. (Reporting by Brijesh Patel in Bengaluru, editing by Ed Osmond and Louise Heavens)