Gold Drops Over 1% as Dollar, Treasury Yields Surge on Fed Rate Hike Bets

Gold prices fell sharply on Wednesday as a stronger U.S. dollar, surging Treasury yields and renewed expectations for another Federal Reserve interest rate hike pressured the precious metal.

Spot gold dropped 1.6% to settle at $4,287.35 per ounce, while U.S. gold futures declined 1.2% to $4,322.70. The dollar climbed to a nearly two-month high, making dollar-denominated gold more expensive for overseas buyers.

Rate hike expectations strengthened after S&P Global data showed U.S. business activity accelerated for a fourth consecutive month in September, reaching its fastest pace since July 2021. Both manufacturing and services contributed to the expansion, while input-cost inflation reportedly climbed to its highest level in four years.

The combination of resilient economic growth and persistent inflation reinforced expectations that the Fed could tighten monetary policy again. Fed Governor Michael Barr said inflation remains above the central bank's 2% target and that further policy adjustments would likely be necessary.

Treasury yields surged alongside rate expectations. The benchmark 10-year yield jumped 16.8 basis points to 5.116%, its highest level since July 2007. The five-year yield closed at 4.998%, while the two-year yield rose to 4.897%. Higher yields typically reduce gold's appeal because the metal provides no interest income.

Oil prices added another source of inflation concern as escalating U.S.-Iran tensions weakened hopes for diplomatic progress. Brent crude rallied 4.3% to settle at $103.50 per barrel, snapping a five-session losing streak.

Iranian President Masoud Pezeshkian said Tehran remained willing to pursue diplomacy but would not accept negotiations under pressure. His remarks followed heightened rhetoric between Iran and U.S. President Donald Trump.

U.S. Secretary of State Marco Rubio also tempered expectations surrounding recent contacts with Iranian officials, describing them as a continuation of previous discussions rather than a major breakthrough.

With the dollar strengthening, Treasury yields near multi-year highs and markets increasingly focused on further Fed tightening, gold remains sensitive to incoming U.S. inflation, economic and interest-rate signals.