* Holdings in SPDR Gold Trust fall 0.3% on Monday * U.S. 10-year Treasury hits over three-month peak * Dollar rises against its rivals * Palladium down more than 4% (Updates prices) Sept 28 (Reuters) - Gold prices dropped more than 1% to hit a seven-week low on Tuesday, as the dollar strengthened and U.S. Treasury yields surged on expectations of a sooner-than-expected hike in interest rates by the Federal Reserve. Spot gold was down 0.8% at $1,736.81 per ounce by 01:43 p.m. EDT (1743 GMT), after falling to its lowest since Aug. 11 to $1,726.19 earlier in the session. U.S. gold futures settled 0.8% lower at $1,737.5 per ounce. “The dot plots set by FOMC members signalling an earlier-than-previously-expected rise in Fed’s fund rates, and the move higher across the yield curve continue to have a negative impact on gold,” said Bart Melek, head of commodity strategies at TD Securities. Higher interest rates increase the opportunity cost of holding non-yielding bullion. Benchmark U.S. Treasury yields rose back above 1.5% to their highest in more than three months, with markets starting to price in higher future inflation. Some investors view gold as a hedge against higher inflation that could follow stimulus measures, but higher Treasury yields dull some of the appeal of the non-yielding commodity. Indicative of sentiment, holdings of the SPDR Gold Trust fell 0.3% to 990.32 on Monday. Fed Chair Jerome Powell said on Tuesday the U.S. economy was still far from achieving maximum employment, a key component of the central bank’s requirements for raising interest rates. The dollar index rose 0.4%, making gold more expensive for holders of other currencies. “The USD has been further appreciating over the past few days, which is adding to the pressure on gold prices. Market participants appear to expect earlier rate hikes to be implemented by the Fed,” Commerzbank analysts said in a note. Silver slipped 0.8% to $22.47 per ounce, palladium fell 4.3% to $1,879.35, and platinum dipped 1.8% to $963.27. (Reporting by Brijesh Patel in Bengaluru; editing by Uttaresh.V and Richard Chang) Our Standards: The Thomson Reuters Trust Principles.