In reality there wasn't much substance in Mr. Bernanke's comments, the market was just caught off guard by his direct reference to the dollar, a topic normally reserved for the Secretary of the Treasury. We suggested yesterday that dollar gains and gold losses were likely to be short-lived.

Mr. Bernanke expressed concerns about the inflationary impact of the weak dollar. The market viewed this as further confirmation that the Fed will hold steady on rates in the short-term and may begin raising rates by the end of the year.

However, the chairman also emphasized the Fed's commitment to its dual-mandate, price stability and maximum sustainable employment/growth.

If the Fed were truly interested in managing the dollar, it has two tools at its disposal: Interest rates, or the price of money. And money supply.

Monetary policy in both of those areas has been exceedingly dollar negative in the past year. If the Fed were to hold steady on 25-Jun, as is widely expected, the Fed funds rate will still be half of the Eurozone refi rate and 60% lower than the BoE's base rate. That's assuming the ECB and the BoE hold steady on rates tomorrow in line with market expectations.

FX flows follow yield, so the dollar is going to remain comparatively unattractive.

As for money supply, the spigot has been wide open since late last year, providing liquidity to the ailing banking sector. Given the recent bout of negative news, we don't expect the Fed to stem the tide any time soon.

Not surprisingly, Chairman Bernanke failed to acknowledge in his speech the role that Fed policy has played in the dollar's decline and the resulting inflation.

There has been some concern expressed about direct US intervention to support the dollar. This seems highly unlikely, as dollar purchases would seemingly be in direct conflict with ongoing policy operations.

Additionally, one of my former colleagues, Marc Chandler of Brown Brothers Harriman noted in an FT interview that, "President Bush is the first US president since the end of the Bretton Woods agreement in 1973 who has not authorised intervention in the foreign exchange market." It seems unlikely that he would break that trend this late in his administration.

While inflation has certainly become the headline story in recent weeks, the ongoing credit crisis is starting to elbow its way back onto the front page. The dollar had been defensive prior to the Bernanke speech as a result of heightened banking sector worries and the continued decline in housing prices.

John Reade, metals analyst for UBS summed it up nicely yesterday: "[W]e have a simplistic view of the credit crunch and believe two things are required for it to end. US house prices need to stop falling - which they clearly are not - and banks need to rebuild balance sheets. Following the nasty sell-off in bank stocks yesterday this is proving somewhat harder than hoped."

UBS also warned of an impending uptick in risk aversion. If this forecast proves accurate, the dollar will be back under pressure as a result of flows into safe-haven, low yielding currencies such as the yen and Swiss franc.

Heightened risk aversion should also benefit gold, both as a result of direct safe-haven buying and due to renewed dollar weakness.

Gold Market Movers:

EIA crude oil stocks at 10:35 ET.

US ISM-NMI for May at 10:00 ET, expected to be around 51.0.

US Q1 productivity revised upward to 2.6%.

US ADP employment survey for May +40k, well above market expectations, versus 13k in Apr.

US MBA mortgage applications index for the week ended 30-May -15.3%; purchases -5.4%, refis -25.7%.

Eurozone retail sales for Apr -0.6% m/m, below expectations.

UK services PMI for May falls to 49.8, a five-year low and below expectations.

Eurozone services PMI for May confirmed at 50.6.

OECD again cuts outlook on pessimistic U.S. forecast

South African gold output drops 15.6% in first quarter

Lehman hedges lose $500m to $700m