Gold drops almost 2 percent as dollar rally continues

By Marcy Nicholson and Clara Denina

NEW YORK/LONDON (Reuters) - Gold dipped almost 2 percent on Tuesday as the dollar extended gains following a raft of strong U.S. data and recent comments from Federal Reserve Chair Janet Yellen that reinforced the central bank's tightening bias on monetary policy.

Spot gold dropped to a two-week low of $1,185.35 an ounce earlier and was down 1.7 percent at $1,186.90 by 2:19 p.m. EDT (1819 GMT), its biggest drop since April 30.

U.S. gold futures for June delivery settled down $17.10 at $1,186.90 an ounce.

"Intriguingly, gold has failed to find much if any demand from safe haven buying ... today despite the sharp drop in European and U.S. equity markets," said Fawad Razaqzada, technical analyst for Forex.com.

"This, we think, argues against a sharp recovery now."

The dollar rallied 1.3 percent against a basket of leading currencies, after data showed U.S. business investment spending plans increased solidly for a second straight month in April.

Separately, new U.S. single-family home sales rose more than expected in April and consumer confidence rose in May.

This added to optimism after strong inflation numbers on Friday and Fed Yellen's comments that interest rates will be raised this year.

A stronger dollar makes gold more expensive for holders of other currencies, while higher U.S. interest rates would dent demand for the non-interest-paying metal, increasing the opportunity cost of holding it.

"The next big data release from the U.S. or the next confirmation of an interest rate hike, whenever that will come, I think that's when we are going to see the final washout in gold," Mitsubishi Corp strategist Jonathan Butler said.

Gold's inverse correlation with the dollar has started to strengthen again, and weaken against yields, Barclays said in a note.

"We maintain the view that the third quarter is likely to be the weakest quarter for gold, given that we expect the Fed to start increasing rates in September, but the potential downside is likely to be limited," it said.

Bullion traders will focus on Greece, as any worsening of its debt crisis could potentially trigger demand for gold coins and bars. The metal is usually seen as a hedge against political and financial risk, although the impact on demand for metals from wider political worries is usually short lived.

Silver fell 2.3 percent to a two-week low of $16.72 an ounce. Platinum dropped 2.3 percent to $1,121.24 an ounce and palladium slipped 1 percent to $778.50 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Alison Williams, Mark Potter and Diane Craft)