Gold prices tumbled during Tuesday's Asian session, falling to their lowest level in seven months as the United States dollar strengthened sharply following a surge in the USD/JPY exchange rate and investors continued to price in the prospect of higher U.S. interest rates.
By 3:50 pm AEST (5:50 am GMT), spot gold was down 1% at US$3,977.46 per ounce.
The decline coincided with a sharp fall in the Japanese yen, which lifted the USD/JPY pair above the 162.00 level to its highest point since 1986.
The rally in USD/JPY also fuelled a broader rebound in the U.S. dollar after the currency had weakened earlier this week amid expectations that tensions between the United States and Iran could ease.
A firmer greenback typically weighs on non-yielding assets such as gold by making the precious metal more expensive for holders of other currencies.
Investor sentiment has also shifted towards expectations of further monetary tightening by the U.S. Federal Reserve.
Markets are currently pricing in three interest rate increases this year, with the CME Group FedWatch Tool indicating a 63% probability of a rate hike in September.
Geopolitical developments remain another key focus for bullion markets. Investors are awaiting further clarity on potential negotiations between the United States and Iran in Doha, despite Tehran stating on Monday that no meeting had been scheduled.
The uncertainty follows weekend missile exchanges that tested an interim ceasefire intended to end the four-month conflict between the two countries.
Looking ahead, traders will monitor the latest U.S. Job Openings and Labor Turnover Survey (JOLTS) data for further clues on the strength of the labour market and the outlook for Federal Reserve policy.
Attention will then shift to the European Central Bank's annual forum in Sintra, Portugal, on Wednesday, where newly appointed Federal Reserve Chair Kevin Warsh is scheduled to participate in a key monetary policy panel following his unexpectedly hawkish debut as Fed Chair earlier this month.
