Gold drops to two-week low as dollar rallies

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold fell nearly 1 percent to a two-week low on Tuesday as the dollar pushed higher following recent comments from Federal Reserve Chair Janet Yellen that reinforced the U.S. central bank's tightening bias on monetary policy.

Spot gold was down 0.8 percent at $1,197.46 an ounce by 0644 GMT, after slipping as low as $1,195.40.

Yellen said on Friday that the U.S. central bank was poised to raise interest rates this year as the U.S. economy was set to bounce back from an early-year slump.

Investors believe higher U.S. interest rates would dent demand for non-interest-paying gold, while boosting the dollar.

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

"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," Barclays' analyst Suki Cooper said in a note dated Monday.

The greenback touched a one-month peak versus a basket of major currencies, hitting an eight-year high against the yen, as it won support from Yellen's upbeat comments.

A stronger dollar makes gold more expensive for holders of other currencies, and also diminishes its safe-haven appeal.

Bullion traders will be keenly eyeing U.S. economic data due later in the day, including consumer confidence and new home sales, for clues on the strength of the economy and how it would impact the Fed's monetary policy.

The focus was also on Greece, which said on Monday it needed aid urgently to be able to pay a loan instalment due next week.

Any worsening of the Greek debt crisis could potentially trigger safe-haven demand for gold.

(Additional reporting by Manolo Serapio Jr.; Editing by Richard Pullin)