The dollar hit the skid on Tuesday when the Fed's Vice Chairman Donald Kohn gave a strong indication that focus remains squarely on growth risks, despite recent strong inflationary indications. Mr. Kohn's remarks came on the heels of the surprise 1% jump in PPI, which was more than twice the increase the market was expecting. Subsequent comment's by William Poole, President of the St. Louis Fed and a monetary hawk, reiterated these sentiments and bolstered expectations that the Fed will continue on its easing path in the hopes of staving off a recession.

Fed Chairman Ben Bernanke will give his semi-annual report on monetary policy to the House Finance Committee beginning at 10:00ET today. His comments are expected to echo the tone of Mssrs. Kohn and Poole, but the market will be watching closely for any variation of implication toward actual policy moves.

The market seems to have already made up its mind, with a half point rate cut at the 18-Mar FOMC meeting now fully priced in. Fed funds futures originally retreated on yesterday's hot PPI number, but quickly rebounded on the dovish Fedspeak. Deferred contracts continue to trade with an implied yield of 2.25% - 2.05%.

Expectations of a 50bp rate cut and widening interest rate differentials hit the dollar hard. The more accommodative expectations came in the wake of much better than expected economic indications out of the Europe, suggesting the ECB will be inclined to keep on their steady inflation fighting track. Higher yielding currencies such as the A$ and NZ$ got a boost as well. Lower interest rates in the US decreases the attractiveness of treasury instruments and therefore decreases demand for the dollars it takes to buy them.

The ECB's Axel Weber recently suggested that investors betting on a Eurozone rate cut were underestimating inflation. This comment lends further confidence to the scenario that favors the ECB to leave rates unchanged at 4% in March and further underpins the euro.

The dollar index slumped to a new all-time low with the breach of 74.48 (23-Nov-07 low), lending credence to the scenario that calls for further losses toward 72.00. The dollar fell against most major currencies, hitting new record lows against the euro and Swiss franc.

EUR-USD surged above the previous record high at 1.4967 as well as the long standing 1.5000 objective. The next upside target is at 1.5200/18. A falling dollar increases the appeal of gold as a hedge and makes the yellow metal less expensive for holders of foreign currencies. The dollar has firmed modestly in more recent trading on ECB rate checking rumors.

Oil has hit a new all-time high as well, as dollar based crude becomes increasingly attractive to overseas buyers. Futures on NYMEX have exceeded the $102/b level, while Brent spot finally surged above the $100/b mark. With crude stockpiles continue to advance and OPEC maintaining that supply/demand fundamentals are in balance, the rise in oil has become an inflationary play.

Yesterday's PPI number showed that inflation at the wholesale level is 7.4% y/y, the hottest pace since 1981. A wide range of commodities, from ags to industrial metals and nearly everything in between have been soaring recently. While the grains are correcting today on profit taking, the CRB index has hit a new all-time high today at 405.61. The precious metals have been setting new record and historic highs as well. Gold is the traditional hedge against inflation so its not surprising to see new all-time highs in the yellow metal, given the current inflationary environment.

Platinum remains well bid, within reach of the record highs on persistent concerns about South African output. South Africa is the world's largest producer of platinum, but mining efforts have been plagued by a power crisis that is expected to last for the next 4 years at least. The platinum market has been in deficit 8 of the last 9 years. The deficit is likely to grow to 400k - 500k ounces this year. South Africa is also the second largest global gold producer, so the yellow metal has been underpinned by its own supply concerns as well as soaring platinum.

Silver has pushed above $19, making $20 increasingly attractive. Palladium has exceeded 550.00 as it continues its march toward $600.

Gold Market Movers:

US durable goods orders for Jan fell to 5.3%, well below market expectations, versus a revised figure of +4.4% in Dec.

US MBA mortgage market index fell 19.2% for the week ended 22-Feb.

German import prices surged 0.8% in Jan, well above market expectations.

Fed Chairman Bernanke speaks before House Finance Committee beginning at 10:00ET.

Is the gold bull market unstoppable?

Dollar Falls to Record Against Euro on Fed Rate-Cut Speculation

Stock index futures suggest a lower open on Wall Street.

Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals. He has spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. In 1988 Mr. Grant joined MMS International as a foreign exchange market analyst. MMS was acquired by Standard & Poor's a short time later. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. As a manager of the award-winning Currency Market Insight product, he was responsible for the daily real-time forecasting of the world's major and emerging currency pairs, along with the precious metals, to a global institutional audience. Pete was consistently recognized for providing invaluable services to his clients in the areas of custom trading strategies and risk assessment. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

-- Posted Wednesday, 27 February 2008 | Digg This Article