May 28 (Reuters) - Gold prices dropped to a two-month low on Thursday as inflation fears were stirred up after the U.S. and Iran traded more air strikes, boosting the dollar and crude prices, and fueling expectations of higher interest rates.
Spot gold was down 1.5% at $4,389.99 per ounce as of 0902 GMT, earlier falling to its lowest level since March 26. U.S. gold futures for June delivery fell 1.5% to $4,387.70.
The dollar rose to a one-week high, making greenback-priced bullion more expensive for holders of other currencies.
Oil prices jumped more than 2% after Iran's Revolutionary Guards said they targeted a U.S. airbase in response to a U.S. attack in the port city of Bandar Abbas.
Bullion has been under pressure since the start of the U.S.-Israeli war with Iran in late February. The effective closure of the Strait of Hormuz has prompted a surge in Brent crude prices, fanning inflation woes and propelling rate hike expectations."Gold drops to a two-month low and into bear market territory as fresh U.S.-Iran hostilities douse hopes of a deal. Heightened geopolitical uncertainty directs risk-off flows to the dollar, just as higher oil prices exacerbate inflation fears," Nikos Tzabouras, a senior market analyst at Jefferies-owned Tradu.com, wrote in a summary.
"Higher-for-longer rate prospects weigh on non-yielding assets, compounding bullion's weakness and leaving it vulnerable to new 2026 lows."
Despite being an inflation hedge, non-yielding bullion underperforms in high interest rate environments as investors turn to assets like Treasury yields that offer better returns.
Federal Reserve Governor Lisa Cook on Wednesday said she feels the U.S. central bank should hold short-term interest rates steady for now, but, with tariffs, the Iran war, and a surge in AI-related investment pushing prices higher, she is prepared to hike rates if needed.
The market awaits the U.S. Personal Consumption Expenditures data, the Fed's preferred inflation gauge, due later in the day, for cues on the Fed's monetary policy path.
Spot silver fell 1.7% to $73.34 per ounce and platinum lost 1.3% to $1,893.16. Both metals earlier hit a near one-month low. Palladium slid 1.8% to $1,366.00.
Reporting by Anjana Anil in Bengaluru; Editing by Hugh Lawson
