* Spot gold may break support at $1,299/oz -technicals
* Fed signals one more rate hike this year
(Adds comment, updates prices) Sept 21 (Reuters) - Gold dropped to its lowest level in over three weeks on Thursday as a stronger dollar and increasing prospects of a December rate hike by the Federal Reserve curbed appetite for the metal.
Spot gold was down 0.1 percent at $1,299.31 an ounce
at 0326 GMT, after earlier touching its lowest since late August at $1295.65.
U.S. gold futures for December delivery fell 1
percent to $1,302.60 an ounce. The U.S. dollar rose and bond yields jumped to their highest levels in six weeks after the Federal Reserve announced a plan to start shrinking its balance sheet in October and signaled one more rate hike later this year.
The dollar on Thursday extended gains and inched up against
a basket of currencies . It rose 0.2 percent versus the yen .
"The Federal Open Market Committee (FOMC) was surprisingly upbeat and (held) the line on rate hikes in 2017 and 2018 which has caught traders by surprise," said Jeffrey Halley, a senior market analyst at OANDA. The Fed's announcement on another interest rate hike this year took markets by surprise as a series of poor inflation readings had dampened expectations for such a step. Higher interest rates tend to boost the dollar and push bond yields up, putting pressure on greenback-denominated, non-yielding bullion. Elsewhere, the Bank of Japan kept monetary policy steady on Thursday and maintained its upbeat view of the economy, signaling its conviction a solid recovery will gradually accelerate inflation towards its 2 percent goal without additional stimulus. "In the bigger picture, I still see the price action as corrective. It should base in this $1,280-$1,296 region. I see global uncertainty, diversification as continuing to underpin gold for now," Halley said. U.S. allies on Wednesday said that enforcing international sanctions on North Korea, and not mere dialog, was key to getting Pyongyang to give up its nuclear weapons after President Donald Trump on Tuesday said he would "totally destroy" the country if threatened and mocked its leader as a "rocket man."
Geopolitical risks can boost demand for safe-haven assets such as gold. Spot gold may break support at $1,299 per ounce and fall more towards the next support level at $1,281, said Reuters technicals analyst Wang Tao.
In other precious metals, silver was down 0.3 percent
at $17.08 an ounce, after falling to its lowest since Aug. 25 in the previous session.
Platinum eased 0.3 percent at $938 an ounce, after
hitting its lowest since late July on Wednesday.
Palladium was up 0.6 pct to $915.15 an ounce.
(Reporting by Apeksha Nair in Bengaluru; Editing by Richard Pullin and Joseph Radford)