Gold prices dropped as much as 1% on Tuesday as the dollar and Treasury yields firmed, and investors squared positions ahead of a widely expected large interest rate hike by the U.S. Federal Reserve this week.

Spot gold was down 0.7% at $1,664.19 an ounce by 1:46 p.m. ET (1746 GMT), lingering near a 29-month low hit last week. U.S. gold futures settled 0.4% lower at $1,671.10.

"Gold can't shake off any of these aggressive Fed tightening concerns ... yields continue to skyrocket, especially in the short end of the curve — that's just been consistently putting pressure on gold," said Edward Moya, senior analyst with OANDA.

The Fed is expected to hike interest rates by at least 75 basis points at the conclusion of its two-day policy meeting on Wednesday.

Other central banks are also expected to keep tightening monetary policy in the face of surging inflation.

Sweden lifted interest rates by a full percentage point on Tuesday. Britain, Norway, Switzerland and Japan also hold monetary policy meetings this week.

"A 100 bps hike would likely pressure gold prices lower, whereas a widely anticipated 75bps could see some short-covering activity amid a relief rally," Standard Chartered said in a note.

High interest rates usually dim bullion's appeal as they translate to an increased opportunity cost of holding the asset, which pays no interest.

The dollar held firm near a two-decade high, making bullion more expensive for other currency holders.

The U.S. two-year yield hit an almost 15-year high.

Although, "when global recessionary fears really become the focal point for markets as everyone has become more aggressive with their tightening cycles, that's when gold will have an opportunity," Moya said.

In other precious metals, spot silver slipped 2.2% to $19.17 per ounce, platinum gained 0.1% to $918.55 and palladium dropped 3.6% to $2,145.44.

(Reporting by Kavya Guduru in Bengaluru; Editing by Susan Fenton, Vinay Dwivedi and Maju Samuel)