The rebound above former support at 912/915 is encouraging to the longer-term bullish scenario. A close back above the 50 and 100-day moving averages, at 914.87 and 912.82 respectively, would bode well for the scenario that calls for a return to the 930/950 zone. An eventual push through this area would put the 15-Jul high at 988.00 back in play.

The Fed moved on Wednesday to expand and extend its liquidity facilities, while the SEC extended its emergency limits on short selling of Fannie Mae and Freddie Mac shares. Meanwhile, the President signed the new housing bill.

All of this provided a measure of comfort to Wall Street and the DJIA closed up 186 points. However, the fact that the Fed and regulators seem to be gearing up for a new phase in the credit/liquidity crisis is certainly cause for concern.

The Fed claims they are just looking to head-off any year-end funding issues, conceding that the financial markets remain "fragile." However, I think the move is probably more attributable to Merrill Lynch's sale of $30.6 bln in CDOs at 22-cents on the dollar earlier in the week, which essentially has established a market price for similar assets.

It is likely that this sale has already dragged down the value of similar assets on the balance sheets of other financial institutions, including Fannie and Freddie. The fact that the Fed is prepared to pump additional liquidity into the market and continue to swap treasuries for increasingly suspect assets does not bode well for the dollar.

The Fed's move also lessens the likelihood that they will raise rates any time soon, adding additional weight to the greenback. Odds of a 25bp rate hike by the end of Q3 have eroded to just 16%. Such a move was fully priced in last month after very hawkish comments by Fed Chairman Bernanke. Fed funds futures still show a high probability of a rate hike by year-end, but odds are declining.

We have consistently maintained that raising interest rates doesn't make much sense in an environment where the Fed is flooding the market with liquidity. It seems increasingly clear that the Fed will continue to ignore inflation, focusing instead on risks to growth and employment.

Today's much larger than expected surge in initial claims to 448k for the week ended 26-Jul, raises concerns about a surprise in Jul nonfarm payrolls tomorrow. Rising unemployment also makes it increasingly unlikely that the Fed will launch a tightening campaign before year-end.

Continuation of expansionary and easy monetary policy could very easily spark a resumption of the long-tern downtrend in the dollar. If the greenback resumes its downtrend, we would expect gold to resume its long-term uptrend.

Gold Market Movers:

US Chicago PMI for Jul rose to 50.8, above market expectations, versus 49.6 in Jun.

US Q2 GDP (advance) +1.9%, about what the market was expecting, versus +0.9% in Q1.

US initial jobless claims for the week ended 26-Jul surged 44k to 448k, well above market expectations.

US Monster employment index for Jul -6 to 157.

Eurozone HICP inflation rises to 4.1% y/y, a 16-year high.

UK house prices for Jul -8.1% y/y.

UK GfK consumer confidence for Jul falls to a record low of -39.

Swiss CPI for Jul rises to 3.1%, near a 15-year high.

Deutsche Bank writedowns swell beyond $11 billion

Central banks fire new round at credit crisis

Is market 'fix' tomorrow's crisis?

Weak US growth adds to gloom

European inflation quickened to 16-year high in July