Gold falls 2% as escalating Middle East tensions reinforce US rate-hike bets

"Oil prices yet again have moved higher, and with the higher Brent levels, I think there's continued expectations that U.S. yields are likely to go higher, probably maybe even a rate hike as early as September," which is pressuring gold, said Bart Melek, global head of commodity strategy at TD Securities.

Traders are now pricing in about a 55% chance that the Federal Reserve will hike rates in September, according to the CME FedWatch Tool. FEDWATCH/

Yields on the benchmark 10-year U.S. Treasury note US10YT=RR drifted higher. The U.S. dollar gained 0.2%, making bullion more expensive for overseas buyers. USD/ US/

Fed Chair Kevin Warsh this week declared his determination to bring inflation down without specifically hinting at how.

Meanwhile, data released on Tuesday showed that U.S. consumer inflation slowed in June, while data from Wednesday showed a decline in the producer price index.

"Even if some of the near-term economic data softens, persistently high energy prices would make it difficult for the Fed to adopt a more dovish stance. For the same reason, investors are preferring the dollar over the zero-yielding gold," Fawad Razaqzada, market analyst at Forex.com, said in a note.

July 16 (Reuters) - Gold fell 2% to a more than two-week low on Thursday, as escalating Middle East tensions pushed oil prices and U.S. Treasury yields higher, heightening inflation concerns and reinforcing expectations of elevated U.S. interest rates.

Spot gold XAU= was down 1.7% at $3,989.66 per ounce by 12:35 p.m. EDT (1635) GMT, after falling as much as 2% earlier and touching its lowest since July 1. U.S. gold futures GCcv1 dropped 1.4% to $3,994.10.

Oil prices rose over 1% as concerns over Middle East energy supplies increased after Iran asked Yemen's Houthis to stand ready to close the Red Sea oil route if the U.S. strikes Iranian power infrastructure. O/R