The dollar index has tumbled back below 72.00 and more than half of the recent corrective rally has now been retraced. These losses return considerable confidence to the dominant bear trend. Renewed weakness in the dollar increases the appeal of gold as a means to safeguard wealth, while simultaneously making gold less expensive for holders of foreign currencies.

French President Nicolas Sarkozy has proposed that France and Britain work together to pressure the US into supporting its currency. There has been constant talk in the FX market about coordinated intervention to prop up the ailing greenback. However, it's been nothing but talk thus far.

We have noted previously that intervention without the support of a policy shift, i.e. higher US interest rates, is likely to be wasted effort. Like reiterating the "strong dollar policy" is a waste of Treasury Secretary Paulson's breath. It would make no sense whatsoever for the US to intervene and buy dollars, while simultaneously lowering interest rates.

Europe and Japan certainly have an understandable desire to underpin the dollar, but without the support of the US their options are likely to be limited to interest rate cuts of their own. If the ECB and BoJ opt to simply buy dollars instead in the massive $3 trillion a day FX market, any relief will be short-lived.

Nonetheless, I maintain that the FX market is going to want to find that point where at least the ECB either dives into the market or makes a rate cut. Market chatter suggests that point is north of 1.6200 in the EUR-USD rate.

The euro has regained the 1.5700 level today on the back of unexpected improvements in German and French business sentiment. With over 61.8% of the decline from 1.5905 to 1.5342 retraced, a retest of the record high is anticipated. Further out, 1.6000 and 1.6200 remain valid objectives. Such a move would likely translate into gold back above $1,000.

The improvement to Eurozone business confidence suggests that the ECB will have a difficult time justifying a rate cut any time soon. The ECB's primary mandate is price stability and with inflation running at a 14-year high, they've actually hinted at a rate hike. They certainly don't want to cut rates only to be forced to raise them again as inflation worsens. Market odds for a 25bp rate cut are presently less than 25%.

Meanwhile yesterday's sharp drops in US consumer confidence and home values, along with this morning's drop in durable goods orders, is further evidence that the US economy remains in dire straights. Fed funds futures are fully priced for a 25bp cut on 30-Apr with odds of a half point cut at about 44%. The prospect of lower interest rates will continue to weigh on the dollar.

Given the negative outlook for the greenback, continued worries about the health of the US economy, the persistent credit/liquidity crisis and the resulting worries about systemic and counterparty risks, we anticipate that gold will continue to shine. While occasional increases in volatility as a result of periodic bouts of deleveraging and risk reassessment are likely, continue to view dips as buying opportunities.

Gold Market Movers:

US durable goods orders for Feb fell 1.7%, much worse than the market was expecting, versus a revised -4.7% in Jan.

New home sales for Feb at 10:00ET. The market is looking for further slippage to 0.580M, versus 0.588M in Jan.

EIA crude oil stocks for the week ended 21-Mar at 10:30ET. The market is looking for an increase of 1.7M barrels.

Hoarding by banks stokes fears on credit crisis

Gold has potential to double: UBS

Commodity cycle still in infancy: Deutsche Bank

BlackRock says gold record high may be challenged

Gold in Russian reserves up 2.9% in last three months

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, 26 March 2008 | Digg This Article