The dollar has gotten a little boost within the recent range by renewed weakness in Sterling, which fell to a new 5-week low overseas. A round of soft economic data has heightened expectations of another 25bp rate cut by the BoE tomorrow.

UK consumer confidence fell to a new series low of 70 in Apr, well below market expectations and a 7 point drop from the Mar reading. Additionally, manufacturing and industrial production came in weaker than expected.

While odds of a BoE rate cut have edged higher, the ECB is expected to hold steady on rates once again. Continued decent economic indications from the Eurozone combined with strong inflation and modest relief in the EUR-USD exchange rate suggest that the ECB will maintain its hawkish tone.

The euro has softened against the dollar, but remains at the upper end of this year's range. From the close on 31-Dec-07 to the record 1.6020 high on 22-Apr, the euro gained nearly 10% against the dollar. Since that peak, the euro has retreated just over 4%.

From a longer-term perspective, the dollar has fallen nearly 36% since the launch of the combined currency in 1999. In reality, there is little technically or fundamentally to suggest that recent dollar gains are anything more than a corrective bounce within the long-term downtrend.

Europe may be attempting to reverse the dollar's slide and protect their export markets through jawboning and threats of intervention, or perhaps actual intervention. Mike Kosares makes note of some unusual patterns in the EUR-USD rate in a recent article entitled, Has Europe declared war on the weak dollar?

While the Fed may have suggested that they will not cut interest rates any further, the pronounced interest rate differential with the Eurozone remains. Once speculative short dollar positions have been unwound to some degree, one might expect that natural yield seeking flows into the euro will resume. A resumption of the dominant downtrend in the dollar would be favorable for gold.

It is likely that the Fed would ease further at the first sign of renewed risks to growth and/or a significant retreat in the stock market. In the meantime, they will continue to inject significant amounts of liquidity into the market, which should in theory have a negative impact on yield.

The Fed recently increased the size of its biweekly TAF auctions from $50 bln to $75 bln. The first expanded auction was held this past Monday and had a bid cover of 1.29, meaning there were $96.75 bln worth of bids for the available $75 bln in 28-day funds. Not the highest cover we've seen, but certainly suggestive of strong demand for liquidity.

We suggested last week, upon the announcement of the expansion of various Fed liquidity facilities, that the Fed might be gearing up for an escalation of the financial crisis. These troubling signals come despite repeated suggestions that the worst of the liquidity crisis is behind us.

ETF redemptions have been a significant driving force in the recent retreat in gold. The series of redemptions seen since late Mar took a pause yesterday when GLD saw an increase of 128k to the total ounces in trust.

This may be an early indication that investor demand is returning to the ETF. Such demand has been a major contributor to the long-term uptrend in the yellow metal.

AngloGold, the world's third largest gold producer, reported quarterly earnings of $0.37 per share, versus $0.06 in Q4-07. They also announced that they would seek to raise $1.6 bln by offering new shares and use the moneys to further reduce their hedgebook.

The reduction and buying back of forward gold sales by producers has been another significant driving force in the long-tern uptrend. This is another strong indication that a major producer is anticipating higher prices.

Gold Market Movers:

EIA inventory data for the week ended 02-May shows crude and gasoline builds, along with a slight reduction in distillate stocks.

US pending home sales for Mar 83.0, versus revised 83.8 in Feb.

US productivity for Q1 (preliminary) up 2.2%, better than market expectations, versus a revised +1.8% in Q4-07.

US unit labor costs for Q1 (preliminary) +2.2%, versus a revised +2.8% in Q4-07.

US MBA mortgage market index rose 15.6% for the week ended 02-May: purchases +12.1%, refis +19.3%

Fed's Hoenig says US must "remove policy accommodation in timely manner"

German orders for Mar fell 0.6%.

Eurozone retail sales for Mar -0.4%

UK manufacturing growth for Mar fell 0.5%, versus +0.4% in Feb.

AngloGold adj earnings up, seeks $1.6 bln via rights

India's benchmark gold ETF sees highest volume on festival

More US businesses file for bankruptcy