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Gold prices dropped to a near two-month low on Thursday as increased prospects of more aggressive rate hikes by the Federal Reserve lifted the dollar.

Spot gold fell 0.5% to $1,687.70 per ounce by 0925 GMT, after touching its lowest since July 21. U.S. gold futures slipped 0.7% to $1,697.30.

"The gold market has clearly priced in a more aggressive U.S. Federal Reserve ahead of next week's meeting, reflecting the central bank's determination to fight inflation," said Carsten Menke, Head Next Generation Research at Julius Baer.

While the consensus is for a 75-basis-point (bps) hike, some are calling for a 100 bps increase which is partly reflected in the gold market, Menke said, adding that a 75 bps hike could thus come as a positive surprise for the gold market.

The dollar index held near a two-decade peak scaled last week, as a surprise rise in U.S. August inflation boosted bets for an even more aggressive Fed monetary policy. A stronger dollar makes greenback-priced gold expensive for overseas buyers. [USD/]

Non-yielding gold, which is highly sensitive to rising U.S. interest rates as it stands to lose out to other assets that pay interest, has declined more than $380 since its March peak, when the Fed raised rates for the first time since 2018.

Meanwhile, International Monetary Fund chief Kristalina Georgieva said on Wednesday central bankers must be persistent in fighting broad-based inflation.

"The outlook for gold is bearish ... If you look at the biggest gold fund (SPDR Gold Trust), we have seen liquidation in ETFs," said Jigar Trivedi, senior analyst currency and commodity analyst at Mumbai-based Reliance Securities. [GOL/ETF]

"After $1,680, $1,620 is the next support in gold."

Among other precious metals, spot silver fell 1.4% to $19.42 per ounce, while platinum rose 0.1% to $906.40.

Palladium shed 1.3% to $2,135.41.