Extraordinary measures on the part of the government over the weekend to ensure the viability of Fannie Mae and Freddie Mac have failed to garner the confidence of the market. The two government-sponsored enterprises (GSEs) own or guarantee nearly half of the $12 trillion US mortgage market.

The Fed has given Fannie and Freddie access to the emergency discount window, essentially ensuring liquidity for the GSEs. Meanwhile, US Treasury Secretary Paulson will also seek Congressional approval to buy shares in the two companies in an effort to stabilize their stock prices and boost capitalization.

Obviously, Fannie and Freddie could not be allowed to fail, financial institutions all over the world hold the loans they guarantee. Despite the government bailout, the GSEs still show further downside potential. Analysts at Goldman Sachs believe the GSEs could fall another 35%. The rescue will also come at a significant cost to US citizens and the rest of the world.

The GSEs drawing on liquidity from the discount window is going to require that the Fed make additional dollars available. That additional liquidity is likely to come right off the printing presses and will add further weight to the already vulnerable dollar. As the dollar slides, inflation will worsen globally.

Last week's failure of Indymac Bancorp has increased worries about the health of other US regional banks as well. The burning question is: At what point is a bank too large to be allowed to fail. Look for small and regional banks to remain under pressure from falling share prices and from withdrawals.

We have maintained that the Fed was unlikely to raise rates before the end of the year. UBS economists now believe the Fed will actually cut rates twice over the next five months. Given what has transpired over the past several weeks, I wouldn't be surprised.

Market expectations for Fed rate hikes are in fact eroding rapidly. If the market does concedes that the Fed will have to lower rates again to stimulate the economy and put a bid back under equities, that will put the greenback under considerable pressure.

The dollar index has fallen back below the 72.00 level, but is holding support at 71.82 thus far. I suspect the latter will give way in fairly short order, shifting attention to the 71.18/00 level initially, although potential at that point would be back toward the 70.70 all-time low.

EUR-USD surged back above the 1.5900 level in earlier trading, exceeding the early-July high at 1.5910. Scope is seen for a retest of the record high at 1.6020 from back in Apr. A resumption of the long-tern uptrend would return focus to 1.6200 initially.

As the dollar and equities continue to fall, gold will be increasingly attractive as an alternative asset and means of wealth preservation. Friday's breach of key resistance at 954.70/960.88 bodes well for renewed tests above $1,000. An eventual move to new all-time highs above 1032.20 (17-Mar high) would signal a resumption of the long-term uptrend, returning focus to the $1,200 objective.

[I do apologize for the delayed posting of today's brief report. Our phones have been very busy since I walked in the door at 4:00AM local time. My primary obligation is always to take care of our clients first.]

Gold Market Movers:

White House, Fed will rescue Fannie, Freddie

Indymac: Here come bank failures

Who passes too-big-to-fail test?