President Bush said on Monday that he would be discussing the state of the US economy and the ailing dollar at the European Union summit in Slovenia this week. In an interview on Air Force One he added, "We want the dollar to strengthen."

US treasury secretary Henry Paulson also added his two-cents in a CNBC interview, saying that he would never take the option of foreign exchange intervention off the table. This was a bit of a departure from normal rhetoric for Mr. Paulson who usually espouses that market forces should set exchange rates.

The treasury secretary will meet with G8 finance ministers in Tokyo this week, where the US economy, the dollar and energy prices will undoubtedly all be hot topics.

Finally, Fed Chairman Ben Bernanke chimed in as well with some of his most hawkish comments to date. In a Monday evening speech he said, "The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilising for growth as well as for inflation."

We have heard Mr. Bernanke reference the "anchoring" of inflation expectations in the past. This will be no small task given the dramatic rise seen in energy prices. Bernanke's comments come just one business day after oil recorded its largest one-day price surge ever. Bernanke is going to have to swim and catch the inflation boat, which has already sailed, before he has any hope of dropping that anchor.

Implied threats of intervention, implied threats of rate hikes, calls from the President himself for a stronger dollar, all on the same day. These comments were obviously coordinated and came on a day where the dollar was on the defensive, but was still well off the trend lows.

That begs the question: What might be prompting such coordinated jawboning?

The administration may be just posturing ahead of the EU and G8 summits, showing the world they are at least a little serious about halting the dollar's slide.

The declining dollar has played a huge, if under-reported role in skyrocketing energy prices. Oil prices are already up about 50% this year. If energy prices continue to rise unabated, it puts not only the US economy at risk, but the global economy as well.

The US has resisted any meaningful action to stabilize the dollar, despite repeated calls to do so from around the world. The US has focused primarily on easy monetary policy in the hopes of shepherding the domestic economy through the deflation of the housing bubble and the subprime/credit/liquidity crisis.

These policies of low interest rates and massive liquidity injections have led directly to the decline in the dollar and the resulting global inflation.

The Fed and Treasury may also be attempting to keep the market on its heels in preparation for more bad news. It's anyone's guess what that news might be. Perhaps it is merely to offset growing expectations that the ECB will raise rates next month. On the other hand, it could be something more ominous.

Nonetheless, all the rhetoric has thus far been fairly effective at preventing traders from reestablishing long-term speculative short positions in the greenback.

The dollar remains confined to the range that was established in Mar/Apr against most currencies, suggesting the market is not convinced that a reversal is in the works.

I continue to believe that direct intervention in support of the dollar is very unlikely. I am equally convinced that a rate hike before Dec is unlikely. I think the Fed will continue to place greater emphasis on risks to growth. However, the market doesn't seem to agree with me.

Fed funds futures for Sep have priced in a 25bp rate hike and odds of such a tightening in Aug is slightly better than 50-50.

The bottom line is that the dollar is consolidative within a long-term downtrend. Oil prices remain well bid and further gains seem likely. Consequently, inflation remains a serious global threat. US stocks remain on the defensive after the DJIA repeatedly failed to sustain tests above 13,000.

Surrounding all this is a general sense of uncertainty about the US and global economies. Physical gold offers portfolio diversification and a convenient and liquid means of preserving wealth in these turbulent economic times.

Additionally, the months of June and July have historically provided excellent seasonal buying opportunities. Well worth considering before you head off on vacation.

Gold Market Movers:

US trade deficit for Apr widened to -$60.9 bln, from -$56.6 bln in Mar.

UK manufacturing production +0.1% y/y. Industrial production +0.2% y/y.

UK RICS house price balance for May rebounds to -92.9 from historic low of -94.7 in Apr. Market was looking for another decline.

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