LONDON (Reuters) - Gold fell to a 2-1/2 week low on Wednesday after reports that Republican senators favoured John Taylor to become the next head of the U.S. Federal Reserve drove the dollar and U.S. bond yields higher.
Taylor, a Stanford University economist, is seen as someone who could put the Fed on a path of faster interest rate increases compared with current Fed Chair Janet Yellen, whose term expires next February.
U.S. 10-year Treasury yields rose to their highest since March.
Higher interest rates push up bond yields and tend to strengthen the dollar, which reduces the appeal of non-yielding bullion and makes dollar-denominated gold more expensive for holders of other currencies.
Spot gold was down 0.2 percent at $1,273.76 an ounce at 1143 GMT after hitting $1,271.45, the lowest since Oct. 6.
U.S. gold futures for December delivery were 0.3 percent lower at $1,274.70 an ounce.
“If he (U.S. President Donald Trump) does indeed choose Taylor, gold is likely to fall sharply,” Commerzbank analysts said in a note.
The market was pricing in one rate increase in December and one more next year, while the Fed itself envisaged three rate hikes in 2018 and was likely to move more rapidly than previously expected under Taylor, they said.
On the technical side, gold slipped below its 100-day moving average, currently at around $1,275.
“If we close below the 100-day moving average we are set for $1,260 or lower, maybe $1,250,” said Robin Bhar, head of metals research at Societe Generale.
Higher interest rates and hopes of tax cuts in the United States were pushing investors to riskier assets, said Bhar.
“You’ve got equities at record levels, the dollar creeping up, bond yields moving higher and tax cuts perhaps giving a tailwind to the U.S. economy, all of which has to be negative for gold,” he said.
Infighting on Tuesday among Republican senators however dampened hopes of quick progress on tax reform, while Commerzbank analysts warned that a sharp rise in interest rates could knock the stock market.
Elsewhere, the European Central Bank is expected to announce on Thursday a trimming of its monthly bond purchases, with data on Wednesday showing German business confidence at a record high.
In other precious metals, silver was down 0.3 percent at $16.89 an ounce.
Platinum was 1 percent lower at $911.05 an ounce and palladium was down 0.2 percent at $960.45 an ounce.
Additional reporting by Apeksha Nair in Bengaluru, editing by David Evans and Jason Neely