Gold prices dropped about 2 percent on Monday, after Japan's intervention in the currency market triggered a rapid rally in the dollar, spooking precious metals investors.

Japan intervened unilaterally in the foreign exchange market on Monday to curb the yen's strength, sending the dollar up more than 1 percent against a basket of currencies.

A stronger greenback makes dollar-denominated commodities more expensive for buyers holding other currencies.

The huge spike in the dollar is pressuring gold prices, said Ong Yi Ling, an analyst at Phillip Futures. But so long as gold stays above $1,700, the sentiment should remain pretty bullish.

The most-active U.S. gold futures contract dropped as much as 2.3 percent to $1,707.7 an ounce, and recovered slightly to $1,713.80 by 0254 GMT. It was headed for a monthly rise of 5.6 percent.

Spot gold fell nearly 2 percent to $1,705.89 earlier and regained some lost ground to $1,711.79, but was still on course for a monthly rise of more than 5 percent after suffering a nearly 11 percent decline in September.

Technical analysis suggested the upside of spot gold will be capped in a resistance range of $1,762-$1,773 per ounce, said Reuters market analyst Wang Tao.

Other precious metals weakened in tandem. Spot silver dropped as much as 2.7 percent to $34.28, and the most-active U.S. silver futures contract also lost more than 2 percent to $34.21.

Spot platinum suffered its worst one-day loss in a month with a 2.7-percent slide. Spot palladium fell 1.8 percent to $651.99.

From here people will play the wind, said a Hong Kong-based gold dealer, Last week gold rose too quickly and we may see a correction coming.

Stop-loss selling also contributed to the quick slide in prices, he added.

Investment interest in gold was rekindled in recent weeks after euro zone leaders progressed toward an agreement on solving the bloc's debt crisis, albeit painstakingly, sending prices up 6 percent last week.

Last week, money managers raised their bullish bets in gold futures and options to the highest in four weeks, data from the U.S. Commodity Futures Trading Commission data showed.

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, registered an inflow of 16.04 tonnes on the week and 11.62 tonnes from the end of September, after a small outflow of 0.38 tonnes in September.

In the days ahead, investors will be watching a policy meeting of the U.S. Federal Reserve, as well as a key Group of 20 meeting for coordinated efforts or pledges to help stabilize world financial markets.

Precious metals prices 0254 GMT

Metal Last Change Pct chg YTD pct chg Volume

Spot Gold 1711.79 -27.65 -1.59 20.60

Spot Silver 34.36 -0.87 -2.47 11.34

Spot Platinum 1598.99 -44.45 -2.70 -9.53

Spot Palladium 651.99 -12.01 -1.81 -18.45

TOCOM Gold 4361.00 116.00 +2.73 16.95 76170

TOCOM Platinum 4097.00 63.00 +1.56 -12.76 20029

TOCOM Silver 86.70 1.10 +1.29 7.04 1359

TOCOM Palladium 1680.00 38.00 +2.31 -19.89 446

COMEX GOLD DEC1 1713.80 -33.40 -1.91 20.57 21723

COMEX SILVER DEC1 34.38 -0.91 -2.59 11.10 3523

Euro/Dollar 1.4045

Dollar/Yen 79.18

TOCOM prices in yen per gram. Spot prices in $ per ounce.

COMEX gold and silver contracts show the most active months

(Editing by Miral Fahmy)