Gold prices languish at 2-1/2-month low as investors await Fed meet

© Reuters. FILE PHOTO: Gold bars and coins are stacked in the safe deposit boxes room of the Pro Aurum gold house in Munich, Germany, August 14, 2019. REUTERS/Michael Dalder

By Bharat Gautam

(Reuters) - Gold prices dropped on Tuesday to their lowest since mid-February, as an elevated dollar and an imminent interest rate hike by the U.S. Federal Reserve dampened bullion's appeal as an inflation hedge.

Spot gold was down 0.5% at $1,854.21 per ounce, as of 0816 GMT, its lowest level since Feb. 16. U.S. gold futures were also down 0.5% at $1,854.40.

There are short-term downside risks for gold and we've got a target range of $1,810 to $1,790, with pressure coming from higher interest rates and the dollar, said Michael McCarthy, chief strategy officer at Tiger Brokers, Australia.

The dollar remained near 20-year highs, making greenback-priced gold less attractive for overseas buyers, while benchmark 10-year Treasury yields on Monday hit 3% for the first time since December 2018, a key psychological milestone.

The U.S. central bank's Federal Open Market Committee will begin its meeting on interest rates later in the day and is expected to hike borrowing costs by half-a-percentage point when it announces its decision on Wednesday.

The Fed raised its policy interest rate by 25 basis points in March, and is soon likely to start trimming its asset holdings, as it attempts to tighten pandemic-era monetary policy and rein in soaring inflation.

While gold is perceived as an inflation hedge, higher short-term U.S. interest rates and bond yields tend to increase the opportunity cost of holding zero-yield bullion.

Russian forces shelled Kharkiv, Ukraine's second largest city, and devastated several towns in eastern Ukraine, while the European Union prepared sanctions on Russian oil sales after Germany said it was ready to back an embargo.

Bullion is seen as a safe store of value during times of economic and political crises.

Spot silver dipped 0.3% to $22.57 per ounce, platinum firmed 0.3% to $938.34, and palladium advanced 0.9% to $2,236.43.