A significant sell-off hit the gold market during Asian trading hours on Friday, with the spot price of gold dropping sharply to around $1,986 per ounce, representing a decline of over $40 for the session.

Key Drivers Behind the Weekly Plunge

This week has seen a dramatic fall in gold prices, primarily pressured by a strengthening US dollar. The dollar's gains are fueled by heightened market expectations for further interest rate hikes from the Federal Reserve. Concurrently, investors are weighing uncertainties stemming from a fragile peace agreement between the United States and Iran.

So far this week, the spot gold price has tumbled nearly 4%, positioning it for a potential fourth consecutive weekly loss.

Geopolitical Tensions and Market Impact

Concerns over regional stability resurfaced after the United Nations International Maritime Organization suspended convoy operations through the Strait of Hormuz on Thursday, following a reported attack on a vessel. This incident renewed market worries about the durability of the preliminary U.S.-Iran agreement.

While two U.S. officials cited an Iranian attack on the ship, an Iranian-established "Persian Gulf Strait Authority" stated that vessels not adhering to its designated routes would not be guaranteed safe passage.

The attack report triggered a 1.9% rise in benchmark crude oil prices. Analysts noted this rekindled concerns about the timeline for normalizing oil shipments from the Gulf region. A rebound in oil prices typically acts as a headwind for gold.

Monetary Policy and Dollar Strength

The U.S. dollar index is on track for a second consecutive weekly gain, which increases the cost of gold for buyers using other currencies.

Data released Thursday showed U.S. PCE inflation rose further in May, exceeding 4% for the first time in three years, largely driven by energy price increases linked to Middle East conflicts.

Comments from Federal Reserve officials underscored ongoing inflation concerns. Chicago Fed President Austan Goolsbee noted "a glimmer of hope" in services inflation within the latest report but emphasized that overall inflation remains too high and its trajectory is not ideal. New York Fed President John Williams stated that while inflation is expected to slow this year, it remains well above target, pushing back the anticipated timeline for a return to the 2% goal.

According to the CME FedWatch Tool, traders are pricing in expectations for three rate hikes this year, with the probability of a September increase seen at approximately 63%.

As gold does not yield interest, rising rates diminish its relative appeal to investors.

As of the latest update, spot gold was trading at $1,986.04 per ounce.