PRECIOUS-Gold falls 2% as Middle East tensions fuel inflation fears, rate-hike bets

Rewrites for US morning session

By Noel John

July 23 (Reuters) - Gold fell more than 2% on Thursday, retreating from a two-week high hit in the previous session, as the Middle East conflict drove energy prices higher, fuelling inflation concerns and reinforcing expectations of U.S. interest-rate hikes this year.

Spot gold XAU= dropped 2.1% to $4,041.59 per ounce by 09:14 a.m. EDT (1314 GMT), having hit its highest level since July 7 on Wednesday.

U.S. gold futures GCcv1 for August delivery slid 2.6% to $4,043.50.

The U.S. dollar gained 0.3%, making greenback-priced bullion expensive for buyers overseas, while yields on the 10-year U.S. Treasury note US10YT=RR rose over 1% to a more than one-year high. USD/ US/

"The higher crude oil prices are pushing up bond yields on the notions that central banks will not be able to lower their interest rates because of problematic inflation, and rising bond yields are the enemy of gold and silver market bulls because gold and silver carry no yield," said Jim Wyckoff, a market analyst at American Gold Exchange.

Brent crude oil prices hit $100 a barrel for the first time since late May after Yemen's Houthis said they struck two Saudi oil tankers, raising fears that disruption to global oil supplies could spread beyond the Strait of Hormuz. O/R

Elevated oil prices have been weighing on gold prices as they raised expectations of higher-for-longer interest rates, which tend to diminish the appeal of non-yielding gold.

Investors now await the U.S. Federal Reserve's interest rate decision and Chair Kevin Warsh's comments following the central bank's two-day policy meeting next week.

Traders are pricing in about an 80% chance of a Fed rate hike in September, up from 68% on Wednesday, according to the CME FedWatch Tool. FEDWATCH

"The marketplace expects no change in interest rates (next week), maybe a hawkish lean on the rhetoric. But if the Fed would happen to lean surprisingly dovish or surprisingly hawkish the markets would react," Wyckoff said.

Among other metals, spot silver XAG= slid 4.3% to $57.15 per ounce, platinum XPT= fell 3.1% to $1,593.17, and palladium XPD= dipped 2.8% to $1,255.

(Reporting by Noel John in Bengaluru; Editing by Shreya Biswas)

((Noel.John@thomsonreuters.com;))