Gold extended losses -- after falling the most in two months -- as a more hawkish-than-expected U.S. Federal Reserve underscored the central bank’s aggressive approach to tackling inflation.

A stronger dollar on Thursday pressured bullion, which plunged 1.5 per cent Wednesday, as Fed Chair Jerome Powell made clear the U.S. central bank would act as needed to cool the hottest inflation in almost 40 years. That includes a possible interest-rate liftoff in March and more frequent, larger hikes than anticipated. Money markets are now fully pricing in five Fed hikes this year, pushing interest rates to 1.5 per cent by year-end.

The tumble wiped out gold’s gains so far this year that were driven by investor bets for inflation continuing to outpace bond returns, even with rate hikes expected. The hawkish pivot has challenged that narrative, with 10-year real U.S. bond yields spiking to the highest close in 19 months after Powell’s speech. 

“Despite the threat posed by high inflation, a scenario usually positive for gold, there may be scope for further decline in the price of the precious metal due to the rampant dollar,” said Ricardo Evangelista, senior analyst at ActivTrades. The greenback is likely to remain “supported as the markets continue to price in the Fed’s increasing hawkishness.”

On Thursday, real yields eased slightly, underlining the uncertainty in the outlook for monetary policy with the global economy still facing headwinds from COVID-19. Data showed that U.S. GDP growth topped estimates last quarter, while weekly jobless claims fell faster than expected.

Goldman Sachs Group Inc. raised its 12-month outlook for gold to US$2,150 from US$2,000 following Powell’s comments, on expectations for slower U.S. growth, a rebound in emerging markets excluding China and faster inflation.

“This combination of slower growth and higher inflation should generate investment demand for gold, which we consider to be a defensive inflation hedge,” analysts including Mikhail Sprogis wrote in a note.

Spot gold fell 1.4 per cent to US$1,794.92 an ounce as of 2:27 p.m. in New York, and touched the lowest since Jan. 10. Bullion for April delivery slipped 2 per cent to settle at US$1,795 an ounce on the Comex. The Bloomberg Dollar Spot Index rose 0.6 per cent, extending recent gains. Silver and platinum dropped, while palladium gained.