The dollar surged in overseas trading as the market continued to digest ECB president Jean-Claude Trichet's comments from Thursday. Although there was a strong emphasis on inflation, Trichet also warned that the Eurozone economy would weaken substantially in the second and third quarters.

Trichet's heightened concern about growth risks has been interpreted by the market as an indication that the ECB will not be raising rates again any time soon. The reversing out of these expectations has weighed heavily on the euro and the dollar has benefited.

The FX market has been largely short dollars -- for a multitude of very good reasons, which have not gone away -- but when you're short dollars you must simultaneously be long some other currency. Like euros. It is the squaring of these positions that is driving the dollar higher, despite the absence of any strong fundamental reason to be long the greenback.

Increased worries that the effects of the credit crisis are now spreading around the world plays into this scenario as well. We have seen a significant rise in the dollar, not only against the euro, but also against sterling, Swiss franc and the yen as well, as investors scale back their overseas bets.

A huge £5.9bn ($11.3bn) writedown by the Royal Bank of Scotland is just the most recent evidence of contagion. The UK's second largest bank reported a net H1 loss of £802m ($1.5bn).

In the past couple of weeks, we've also seen a rather precipitous drop in the commodity currencies. The sharp drop in commodity prices has weighed on CAD, AUD and NZD, which in turn has bolstered the dollar.

Repatriation of dollars is certainly helping to bolster the greenback, but it's not really a case of renewed confidence in the dollar. All of the world's currencies are extremely vulnerable as a result of the spreading credit/liquidity crisis, but you have to have your assets denominated in some currency.

I would argue that gold is the best asset when wealth preservation is of paramount concern. Once the market realizes that, we should see the yellow metal rebound.

Gold Market Movers:

US wholesale sales for Jun +2.8%, well above expectations.

US productivity (prelim) for Q2 rose 2.2%, below expectations.

Canada employment for Jul tumbles 55.2k. Unemployment rate 6.1%.

That sinking feeling

RBS slumps to loss after £5.9bn writedown

Fannie tallies a $2.3 bln loss

Global writedowns nearing $0.5 trillion

UBS to buy back stricken debt securities

Gold, oil ratio 'out of whack' after declines

Gold production falls by 12.3pc in South Africa