The liquidation of long euro positions has bolstered the dollar and weighed on gold in recent weeks. Increasingly bad economic data out of the Eurozone in the latter half of July sparked initial selling pressure in the euro. The weakening growth outlook, along with softer commodity prices, allowed the ECB to hold steady on rates last week.

ECB President Trichet's comments at the press conference painted a rather bleak picture for the Eurozone economy. This severely deteriorated expectations that the ECB would raise rates further in coming months to address worsening price risk, prompting a more aggressive sell-off in the euro.

The flaring of the Russia-Georgia conflict last week was just one more reason not to be long euros. The exodus from euros accelerated this week as hostilities intensified. The main beneficiary of euro-flight has been the dollar, which in turn has had a negative impact on gold.

While hostilities have eased over the past 24-hours, currency market reaction -- and gold's too for that matter -- has been muted thus far. I think this geopolitical unrest took the markets completely by surprise. There has also been much discussion in recent days about Russia potentially having its eye on other parts of the former Soviet empire.

Ukraine has consistently been mentioned as another potential interest for Moscow. Georgia and Ukraine have a great deal in common: Both have significant ethnic Russian populations. Both have substantial natural resources, including oil and natural gas. And probably most importantly, both have pro-US democratic governments and are seeking entry into NATO.

Russia is vehemently opposed to either Georgia or Ukraine gaining admittance into NATO, viewing expansion of the alliance to its borders as a security threat. Given Russia's relatively newfound power and wealth as an energy exporter, my guess is that they would just prefer that the US not have so much influence in the region.

The euro had been serving as somewhat of a haven for the past year, seemingly insulated to some degree from the financial market stresses resulting from the US subprime crisis. That has proven not to be the case. The subprime crisis, and the resulting credit/liquidity crisis, has been exported far and wide.

A shooting war on the Continent and risks for expanded hostilities certainly don't help the perception of Europe as a safe-haven. Neither do the frosty relations that are developing between Europe and Russia.

However, I don't think the world really views the dollar as the safe-haven it once was either. In fact there are plenty of reasons to still be quite bearish the greenback. Gold is a far better safe-haven asset and it may just be a matter of time before repatriated dollars start finding their way into the yellow metal.

It's worth noting that gold put in the 2007 summer doldrums low of 641.50 (20-Aug-07 low) about this same time last year. The fact that we've bounced from in front of $800 is encouraging, suggesting scope for a move back to 845.50/850.00. A push back above the latter would ease short-term pressure on the downside and highlight the $900 zone once again.

Gold Market Movers:

EIA data show crude oil stocks for the week ended 08-Aug declined by 0.4M barrels. However, a sizable drawdown in gasoline stocks has prompted a rebound in oil prices.

US business inventories for Jun +0.7%, above market expectations.

US retail sales for Jul -0.1%, below market expectations.

US import prices for Jul +1.7%, export prices +1.4%, both above market expectations.

Norges Bank holds steady on rates at 5.75%.

US MBA mortgage market index for the week ended 08-Aug -1.5%; purchases index unch, refis -4.2%.

Eurozone industrial production for Jun flat, -0.6% q/q.

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