The dollar got a boost intraday when the ECB and the BoE left rates unchanged. While most analysts had anticipated steady rates, there was a slight concern that the ECB might raise rates in an effort to anchor rising price risks. With that risk out of the way, the greenback caught a bid.

All of those dollar gains (and gold losses) were quickly reversed out when ECB President Trichet confirmed at the press conference that a rate hike was indeed seriously considered. This raises the likelihood of a rate hike the next time the ECB meets and is seen as euro positive/dollar negative.

The dollar rebounded again intraday when jobless claims unexpectedly dropped 18k.

The dollar had initially adopted a firmer tone when Fed Chairman Ben Bernanke made specific reference to the currency in a speech on Tuesday. Mr. Bernanke expressed concern about the inflationary impact of the weak dollar and said that the Fed and Treasury were 'closely monitoring developments in foreign exchange markets.'

The Fed certainly has the tools necessary to influence the dollar rates, but the fact is that Fed policy has been exceedingly dollar negative of late. While many are viewing Mr. Bernanke's comments as confirmation that the easing cycle is over, that in and of itself is hardly dollar positive.

If the Fed does hold steady on rates later this month, as is widely expected, Fed funds will still be well below the rates offered in just about every major economy with the exception of Japan.

Fed funds are also well below the rate of inflation, meaning real returns are negative. How negative is dependent on whose measure of inflation you're inclined to believe. The BLS suggests the rate of inflation is about 4%, while some independent measures suggest inflation is nearly 12%. That would put the real rate of dollar returns somewhere in the -2% to -10% range.

It's nearly impossible to build a case for a stronger dollar based on the negative return scenario alone. Factor in that money supply is growing at a double digit pace and that about seals the deal. The most likely track for the dollar is a resumption of the long-tern downtrend.

Also factor in rising concerns about the health of the banking system and you have further evidence that the dollar is exceedingly vulnerable.

There is speculation now that Bernanke's comments earlier in the week were preemptive, in anticipation of the ECB's hawkish tone. What else might the Fed be trying to preempt? The Fed's own Vice Chairman may have given a clue on Capital Hill this morning.

The Fed's Donald Kohn speaking before the Senate Banking committee said that he is bracing for further banking sector write-downs and weak earning in the quarters ahead. He said that this may result in further capital injections.

One could argue that Mr. Kohn's comments are actually quite dovish and in direct conflict with Chairman Bernanke's comments of just two days ago.

If the dollar does indeed go back on the defensive, gauged as a drop in the DX back below 72.00, gold should be back above $900. Such a move would return focus to 935.30/938.85. Above that, 952.80/954.70 would be back in play.

Gold Market Movers:

US jobless claims for the week ended 31-May fell 18k to 357k, a much better number than the market was expecting.

US Monster job index for May dropped 4.6% to 166, down 12% y/y.

BoE holds rates steady at 5.0%.

ECB holds rates steady at 4.0%.

UK Halifax house prices for May -2/4% m/m, well below market expectations.

RBNZ holds rates steady at 8.25%.

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