Gold prices fell on Tuesday as a stronger U.S. dollar and investor caution ahead of the Federal Reserve’s policy decision overshadowed easing geopolitical tensions in the Middle East, while declining oil prices and lower Treasury yields reflected growing optimism that the U.S.-Iran conflict may move toward a diplomatic resolution.

Spot gold dropped 1.3% to $4,021.18 per ounce by 1020 GMT, while U.S. gold futures for August delivery fell 1.4% to $4,021.50. The precious metal remained under pressure as the U.S. dollar hovered near a four-week high, making dollar-denominated bullion more expensive for overseas buyers and curbing international demand.

Market participants are largely focused on the Federal Reserve’s two-day policy meeting, with investors awaiting Wednesday’s interest rate announcement and accompanying guidance for clues on the future path of U.S. monetary policy.

“Gold has been holding to a very tight range based on support in the $4,000 region since late June, which suggests that at some stage there will be a break-out,” Rhona O’Connell, head of market analysis at StoneX, said.

“Fundamentally, the physical markets are still very quiet while professionals are contorting on the interaction between oil, interest rates and the dollar, all of which are important drivers,” she added.

Gold, which pays no interest, tends to perform better when interest rates are low because the opportunity cost of holding the metal declines. Conversely, expectations of higher borrowing costs generally weigh on bullion by increasing the attractiveness of interest-bearing assets such as bonds.

Those dynamics have become increasingly important as investors reassess inflation expectations following recent swings in oil prices driven by tensions in the Middle East. Adding another layer of uncertainty, President Donald Trump renewed pressure on the Federal Reserve to ease monetary policy on Monday, saying the United States should have the world’s lowest interest rates.

However, markets remain uncertain over the Fed’s next move. According to the CME FedWatch Tool, roughly 34% of traders expect a 25-basis-point rate increase at this week’s meeting, while expectations for another increase in September remain elevated.

Geopolitical developments also remained in focus. Trump said Washington was holding “good talks” with Iran and that there was a chance of reaching an agreement to resolve the conflict, though he warned military strikes could resume if negotiations failed.

The diplomatic optimism weighed on energy markets.

Brent crude futures fell $2.53, or 2.9%, to $85.83 a barrel, while U.S. West Texas Intermediate crude dropped $1.98, or 2.4%, to $80.63, extending losses and touching their lowest levels in more than a week.

Investors also reacted to reports that Oman had presented Iran with a proposal for a joint regional mechanism to manage shipping through the Strait of Hormuz using a voluntary fee system. The proposal raised hopes that one of the world’s most strategically important oil transit routes could remain open and secure, easing fears of supply disruptions.

“While flows of vessels through the Strait of Hormuz remain low, the market hopes the situation improves based on new talks between Oman and Iran on a new mechanism for Hormuz,” UBS analyst Giovanni Staunovo said.

The retreat in crude prices also filtered through to the U.S. Treasury market, where investors trimmed safe-haven positions.

The benchmark 10-year Treasury yield, which influences borrowing costs across the economy including mortgages, auto loans and corporate debt, slipped 2 basis points to 4.622%.

The policy-sensitive two-year Treasury yield also declined 2 basis points to 4.301%, while the 30-year Treasury yield fell more than 1 basis point to 5.111%.

Bond yields move inversely to prices, meaning rising demand for Treasuries pushes yields lower.

Lower Treasury yields typically provide some support for gold by reducing the opportunity cost of holding non-yielding assets. However, Tuesday’s decline in bullion suggested that the stronger dollar and uncertainty surrounding the Fed’s policy outlook remained the dominant market drivers.

Investors will now closely scrutinize the Federal Open Market Committee’s policy statement, economic projections and Chair Jerome Powell’s comments for signals on whether policymakers still intend to keep rates elevated to combat inflation or are becoming more confident that price pressures are easing.

Beyond gold, the broader precious metals complex also weakened. Spot silver fell 2% to $57.21 per ounce, platinum lost 1.6% to $1,595.80, and palladium declined 3.2% to $1,250.25.

Analysts said gold’s ability to hold above the psychologically important $4,000 level suggests investors remain reluctant to abandon defensive positions entirely, particularly given persistent geopolitical risks and uncertainty surrounding the Fed’s policy path. A decisive break above or below that range could determine the metal’s next major move, depending on the outcome of the Fed meeting, the trajectory of the U.S. dollar and developments in the Middle East.