Gold drops on strong dollar, Fed's Yellen rate hike comment

By Marcy Nicholson and Clara Denina

NEW YORK/LONDON (Reuters) - Gold fell more than 1 percent on Monday, its biggest drop in more than three weeks, as the dollar climbed on increasing prospects that the U.S. Federal Reserve may start raising interest rates this year.

Chairwoman Janet Yellen said late on Friday an increase in the Fed's benchmark rate "may well be warranted later this year" given sustained improvement in U.S. economic conditions.

Gold, which does not pay any interest, has benefited from a low interest rate environment and central banks' accommodative policies in the years following the 2008-2009 credit crunch.

Spot gold fell as much as 1.4 percent to a one-week low of $1,182.05 an ounce, slightly cutting losses to trade down 1.1 percent at $1,198 by 2:33 p.m. EDT (1833 GMT).

U.S. gold futures for April delivery dropped 1.3 percent to settle at $1,184.80 per ounce.

Any hike by the Fed, which has kept rates near zero since 2008 to stimulate the U.S. economy, could further reduce demand for assets perceived as safer such as gold.

"On the downside, the initial support level stands at $1,182 and then nothing stands out until $1,143," Deutsche Boerse's MNI senior analyst Tony Walters said.

The metal saw month-end and quarter-end selling as it was headed for a second consecutive monthly drop in March and second straight quarterly fall.

Global equity markets surged while Chinese stocks hit a seven-year high on an ambitious government plan to create a modern Silk Road. [MKTS/GLOB]

"Whenever you have roaring strong stock markets, the alternative asset and flight-to-safety factor goes away," said Bill O'Neill, co-founder of commodities investment firm LOGIC Advisors in Upper Saddle River, New Jersey.

U.S. jobs data on Friday, when many will be away from their desks for the Easter long weekend, will be a major event this week and a robust report could see investors position for tighter monetary policy sooner rather than later. [ECONUS]

But analysts agree that the Fed will be anything but aggressive in its rate hike path, with many looking at the first rate increase happening in September instead of June as they predicted earlier.

Spot palladium was down 1.4 percent at $739.30 an ounce, after falling 2.3 percent to $721.98, the lowest since February 2014 with traders pointing to technical selling.

Spot silver fell 1.5 percent to $16.95 an ounce and platinum dropped 1.7 percent to $1,135.50 an ounce.

(Additional reporting by Manolo Serapio Jr in Singapore; editing by Susan Thomas, William Hardy and Diane Craft)