Gold dips 2% as banking fears recede in run-up to Fed decision

March 21 (Reuters) - Gold dropped about 2% on Tuesday as Treasury yields jumped and easing worries over a banking crisis prompted some investors to cautiously return to riskier assets, while markets await the U.S. Federal Reserve's next interest rate decision.

Spot gold dipped 2.1% to $1,938.19 per ounce by 1:31 p.m. EDT (1731 GMT). U.S. gold futures , too, fell 2.1% to settle at $1,941.10. The precious metal hit $2,009.59 on Monday, its highest since March 2022, but has since retreated.

"We're seeing a little bit less risk aversion in the marketplace today... but mainly it's just heavy profit-taking by the shorter-term futures traders after gold prices hit 12-month highs yesterday," said Jim Wyckoff, senior analyst at Kitco Metals.

Risk assets, including equities and oil prices, rebounded after the rescue of Credit Suisse calmed nerves about a bigger banking crisis. That made gold, traditionally used a safe asset during financial instability, less attractive.

All eyes are on the Fed policy decision on Wednesday, with some top central bank watchers saying it could pause further rate hikes.

"The surprise to the marketplace would be if the Fed did nothing and that would be probably significantly bullish for the metals markets," Wyckoff said.

Markets are pricing in an 13.6% chance the Fed will stand pat and an 86.4% likelihood of a 25-basis-point hike, according to the CME FedWatch tool. Higher rates reduce the appeal of non-yielding gold.

"We could see some marginal selling activity below the $1,950/oz mark, but expect that the combination of strong physical demand and resurgent investor flows should keep (gold) prices from tumbling," TD Securities said in a note.

Holdings of the largest gold-backed exchange traded fund New York's SPDR Gold Trust have registered consecutive inflows.

In other metals, spot silver fell 1.2% to $22.25 per ounce, platinum dropped 2% to $968.73 and palladium slid 1.7% to $1,391.14.