The EUR-USD rate has tested back above the 1.5800 level as the ECB maintains its hawkish tone ahead of Thursday's scheduled rate announcement. The ECB is widely expected to raise rates by 25bp to 4.25% this week. The banks target for their refi rate has been at 4.0% since Jun-07.

US Treasury Secretary Henry Paulson met with ECB President Jean-Claude Trichet on Tuesday. The two reportedly discussed currencies and inflation.

"I would just simply say that you can't talk about economic issues without talking about inflation, and when you talk about inflation, you're very quickly talking about food and you're talking about oil," said Mr. Paulson.

It is doubtful Mr. Paulson reiterated his canned statement on the United States' "strong dollar policy" in that meeting, as I'm guessing Mr. Trichet is wise to the ruse.

Given that US Fed funds rate is hovering at 2% and money supply is estimated to be growing around 16% y/y, actual policy is anything but dollar supportive. Yet the lip service must be paid, lest the world lose all faith in the greenback and the decline becomes unmanageable.

I'm sure the ECB chief is fully aware that the US Fed with its dual mandate of price stability and sustainable growth/employment is caught between Scylla and Charybdis.

With inflation in the US running officially at 4.18% and the reality closer to 12%, a rate hike by the Fed is needed to get price risks in check. However, in doing so the Fed would risk collapsing the housing market and the stock market, both of which are already on the ropes.

Meanwhile the ECB only serves one master. Their primary mandate is price stability. Mr. Trichet has expressed concerns that inflation would "explode" if central bankers fail to act decisively.

In an interview scheduled for publication in the German weekly newspaper Die Zeit on Thursday, Mr. Trichet said, "We central banks have a big responsibility. If we're not decisive, there's a risk of inflation exploding. If we act in a decisive way, we can master the situation.''

Having made that statement just last week and given that Eurozone PPI for May came in at a record 7.1% y/y today, the ECB will act tomorrow. How decisive Mr. Trichet is in the press conference will determine the near term fate of the dollar.

If Trichet maintains his hawkish tone in the press conference, implying that a series of rate hikes are at hand, look for the euro to head back to the 1.6020 all-time high from Apr. If this level gives way, focus would shift to 1.6200 initially, but potential would be toward 1.6300 based on a measuring objective.

Such renewed weakness in the dollar would send gold back toward its record high at $1,032.20. A resumption of the long-term down trend in the dollar would also put further upward pressure on oil, which in turn would offer additional support to gold.

Gold Market Movers:

EIA crude oil stocks for the week ended 27-Jun at 10:30ET. Market is looking for 700k bbl draw.

US factory orders for Jun at 10:00ET. Market is looking for +0.5%.

US ADP employment survey for June -79k, a bigger drop than the market was expecting, versus a revised +25k in May.

US MBA mortgage index +3.6% for the week ended 27-Jun; purchases +2.8%, refis +4.7%.

US Monster.com employment index for Jun -3 to 163.

Eurozone PPI for May surged 1.2% m/m and a record 7.1% y/y, well above market expectations, versus 6.2% y/y in Apr.

UK CIPS construction PMI for June tumbled to 38.8 a new series low, versus 43.9 in May.

Energy watchdog expects oil markets to stay tight

ADP shows biggest job loss in nearly 6 years

IMF: Inflation risks propelling more into hunger

U.S. auto sales hit 15-year low

Bullion nears $950 as rally rages on

Video: Golden age of gold