PRECIOUS-Gold drops over 1% as hot US inflation data boosts Fed hike bets

Updates for US morning session

By Pablo Sinha

Oct 14 (Reuters) - Gold fell over 1% on Wednesday, extending losses for a third straight session, as a stronger-than-expected inflation reading increased US Federal Reserve rate hike bets for this month.

Spot gold XAU= dropped 1.7% to $4,086.06 per ounce by 9:03 a.m. EDT (1303 GMT), its lowest since October 7. US gold futures GCcv1 for December delivery fell 1.6% to $4,108.60 per ounce.

The US dollar index .DXY climbed 0.4%, making greenback-denominated gold more expensive for holders of other currencies, while 10-year US Treasury yields also rose. USD/US/

"With the CPI inflationary data coming in hotter than expected and continuing to run at the levels above Fed targets, at this point it portends that the Fed is more likely to raise interest rates," said David Meger, director of metals trading at High Ridge Futures.

"As a result, we've seen the dollar rise and pressure added to the gold market."

The Consumer Price Index rose 0.6% last month after climbing 0.4% in August, the Labor Department's Bureau of Labor Statistics said on Wednesday.

Markets see about a 44% chance of a US rate hike this month, up from about 22% before the inflation data, and are pricing a 95% probability of an increase in December, according to CME's FedWatch Tool.

While gold is typically seen as a hedge against inflation, higher interest rates tend to diminish the appeal of non-yielding bullion.

Fed Vice Chair for Supervision Michelle Bowman said the central bank has time to wait and see how financial markets and the economy evolve after its September rate rise before deciding whether to take any more action.

Oil prices rose on Wednesday after an attack on the headquarters of Saudi Arabia's state-owned oil company, while Iranian officials told Reuters they were deploying new tactics to target ships, seeking to keep oil prices high and influence US midterm elections. O/R

"In the longer term, gold should again benefit from continued strong central-bank buying and renewed concerns over US debt and its rising interest burden," said Julius Baer analyst Carsten Menke.

Among other metals, spot silver XAG= fell 4.1% to $56.99 per ounce, platinum XPT= dipped 2% to $1,629.79 per ounce and palladium XPD= fell 0.7% to $1,118.46 per ounce.

(Reporting by Pablo Sinha in Bengaluru;)

((Pablo.Sinha@thomsonreuters.com;))