Gold drops over 2% in selloff sparked by strong dollar

© Reuters. FILE PHOTO: Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012. REUTERS/Ajay Verma

By Kavya Guduru

(Reuters) - Gold lost more than 2% on Tuesday to sink further below the $1,800 support level as a sharp rally in the dollar and rising interest rates sapped appetite for the non-yielding asset.

Spot gold was trading at $1,765.22 per ounce by 1:45 p.m. ET (1745 GMT), having earlier declined as much as 2.6%. U.S. gold futures settled down 2.1% at $1,763.9 per ounce.

Making the safe-haven metal less appealing for overseas buyers, the dollar hit its highest in about two decades and firmed its position as the preferred refuge for investors worried about a potential recession. [USD/]

"There are more attractive alternatives" to gold in the rising interest rate environment, said Chris Gaffney, president of world markets at TIAA Bank.

Gold is considered a hedge against inflation, but higher interest rates to tame rising price pressures dim the appetite for bullion which pays no interest.

"The near-term technicals for gold and silver are fully bearish, which is also inviting the technically based speculators to play the short sides of the futures markets," said Jim Wyckoff, senior analyst at Kitco Metals.

Investors now await minutes from the U.S. Federal Reserve's June meeting on Wednesday for new clues on the likely magnitude of rate hikes in the coming months.

In the physical market, India's gold imports in June nearly trebled from year-earlier levels as prices corrected and Zimbabwe's central bank said it would start selling gold coins amid runaway inflation. [GOL/AS]

Caught in gold's slipstream, spot silver dropped 4.1% to $19.14 per ounce and platinum declined 2.4% to $864.23. Palladium, however, gained 0.6% to $1,934.43.

Russian businessman Vladimir Potanin, the largest shareholder at top palladium producer Nornickel, said earlier in the day he was ready to discuss a possible merger with aluminium producer Rusal, in part as a defence against Western sanctions.