The dollar climbed to an 8-week high against the euro in overseas trading on speculation that a slowing economy in the Eurozone will ultimately allow the ECB to cut rates. The ECB kept the refi rate at 4.0% today and is likely to confirm a neutral stance in the press conference.

Maintaining price stability is the primary mandate of the ECB and at this point price risks in the EU remain considerable. The Eurozone economy has also shown remarkable resilience this year. While a declared neutral stance by the ECB will help to underpin the dollar in the short-term, it still seems unlikely that a more accommodative monetary policy is on the horizon.

Officials in Europe continue to talk the dollar higher with some success. Mike Kosares suggests in a recent article that there may have actually been some intervention as well. However, such actions rarely have any lasting impact.

Intervention without participation by the US is almost assuredly doomed to failure. While the Fed may be on hold with further rate cuts, the strategy of inflating the economy out of a possible recession seems to be intact, much to the dismay of the rest of the world.

Treasury will continue to utter the words, "strong dollar policy", but in reality supporting the dollar seems to fly in the face of the broader plan to stimulate the economy.

EUR-USD losses have been contained by the 100-day moving average thus far. If the euro begins to recapture some of the recent losses, the fact that the dollar remains in a long-term downtrend is going to become increasingly obvious.

The EUR-USD needs to regain the 1.5500 level to ease short -term pressure on the downside and to suggest that the dominant trend is re-exerting itself. A close back above 1.5400 today would be a good start.

Meanwhile, The Bank of England also held steady on rates today, despite expectations of a 25bp rate cut raised by a recent series of soft economic numbers.

While there were no comments made following the announcement, persistent inflation risks undoubtedly weighed heavily in the decision to maintain the repo rate at 5.0%. As the UK economy slows, it may bring inflation in check, allowing for further rate cuts later this summer. This expectation is likely to keep sterling fairly well contained, perhaps with a slight negative bias.

The dollar remains fairly well contained against the other two major currencies, the yen and Swiss franc. These low yielding currencies have suffered in recent weeks as a result of a heightened appetite for risk, which has benefited the dollar.

However, upside momentum for both the USD-JPY and USD-CHF rates has faltered more recently, suggesting either the dollar has become a little overbought or risk aversion may be on the upswing once again.

The DJIA was unable to sustain the recent push above 13,000. We also suggested in earlier commentary that recent buying interest in the financial stocks was likely short covering and perhaps a short-term speculative trade, resulting from further backstopping by the Fed.

In our opinion it did not appear to be any true conviction on the part of the market that the worst of the financial crisis was over. While you certainly hear the "worst is over" refrain on a fairly regular basis these days, the Fed's recent significant expansion of the various liquidity facilities suggests they may not be convinced either.

If the stock market retreats below 12,600 it will confirm that the Dow remains vulnerable. That would likely spark a drop back to the 50-day moving average, presently around 12,400. If this level eventually gives way as well, we would expect further liquidation of long equity positions.

Such a move would weigh on the dollar and would be supportive of gold. The negative correlation of the dollar and gold would be a significant factor here, but we also believe that investors coming out of the stock market are going to be turning to gold in increasing numbers as a vehicle to protect their wealth.

Oil set a new record high again yesterday, just below the $124/brl level. The strength of oil is going to continue to have a supportive impact on gold. Recent projections that oil is headed toward $200/brl suggests, if nothing else, that the downside for gold is limited and the low of the corrective move may well be in place.

As noted in yesterday's commentary, the gold/oil ratio is presently trading well below its historic norms. This ratio will come back in line at some point, suggesting that the current levels of gold are an excellent buying opportunity.

Based on the present ratio of approximately 7, if oil makes a run to $150, gold would be trading at $1050. If the ratio starts to widen back toward 10, potential for the yellow metal would be toward $1500.

The GLD ETF increased the total ounces in trust for a second consecutive session, gaining nearly 200koz on Wednesday. This too is a good indication that investors are coming back into the market.

Gold Market Movers:

US wholesale sales and inventories for Mar at -0.1% v. 0.5% expected

US initial jobless claims for the week ended 03-May fell 18k to 365k, better than the market was expecting.

Canada housing starts fell in Apr to 214k pace

ECB leaves refi rate unchanged at 4.0%

BoE leaves repo rate unchanged at 5.0%

German IP for Mar -0.5%

SEC to require banks to disclose liquidity

Derivatives trade expands amid volatility