Oct. 3 (Bloomberg) -- Gold in New York fell for the second straight session on speculation that the U.S. Federal Reserve will keep increasing interest rates, slowing the pace of inflation and boosting the value of the dollar.

The gap in benchmark interest rates between the U.S. and the European Central Bank has helped the dollar gain 14 percent this year. The U.S. currency climbed against the euro and yen after an index of U.S. manufacturing in September was higher than forecast, which may prompt policy makers to conclude that Hurricane Katrina won't slow U.S. growth.

``The yield differential between the U.S. and Europe is moving in the U.S.'s favor, and that tends to be negative for gold because it boosts the dollar,'' said Tom Boustead, an analyst at Refco LLC in New York.

Gold for December delivery fell $3, or 0.6 percent, to $469.30 an ounce on the Comex division of the New York Mercantile Exchange. Prices reached a 17-year high of $479 on Sept. 22. The metal dropped 0.7 percent on Sept. 30.

A futures contract is an obligation to sell or buy a commodity at a set price by a specific date.

The dollar earlier rallied to a three-month high against the euro after strengthening to $1.20, a level where traders had placed pre-set orders to buy dollars. The U.S. currency also climbed to a 16-month high against the yen.

Hedge-fund managers and other large speculators in Comex gold futures more than doubled so-called net-long positions, or bets prices will rise, in the past eight weeks to the highest since at least 1983.

The net-long position rose 5 percent in the week ended Sept. 27, the U.S. Commodity Futures Trading Commission said Sept. 30. Speculative long positions outnumbered short positions by 166,100 contracts, up 7,974 from a week earlier, the commission said.

September Surge

Gold may be poised to fall further as investors sell at prices that in September had their biggest monthly gain since March 2004.

``Speculators were very long at a very high percentage based on a historic perspective,'' said John L. Person, President of Nationalfutures.com Advisory Services Inc., a research company in Palm Beach, Florida. Gold may drop to $455 to $460 an ounce this week, he said.

Other analysts said gold may rebound amid renewed concerns about rising consumer prices.

Crude-oil prices are up more than 40 percent since May. Gasoline prices have more than doubled since December, and natural- gas prices have more than doubled since May. Ocean freight charges are up more than 72 percent since early August. Utility rates have risen by 13 percent in 11 months.

``I view the fundamental background for gold as the best it has been since the early 1980s,'' said William O'Neill, a partner at Logic Advisors LLC in New Jersey. Prices may rise to $490 an ounce by the end of the year, he said.

In a sign of accelerating inflation, yields on inflation- indexed 10-year Treasury notes have gained almost 19 basis points, or 0.19 percentage point, since Sept. 5, to 1.763 percent on Sept. 30. The implied yield on the January Fed-funds futures contract rose to 4.185 percent Sept. 30 from 3.785 percent at the beginning of the month.

Some investors buy gold during periods of rising oil to hedge against accelerating inflation. Gold futures surged to $873 an ounce in 1980, when U.S. consumer prices rose more than 12 percent from the previous year.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net

Last Updated: October 3, 2005 13:50 EDT