It as become clear that the media and many institutional analysts are going to keep talking the Dollar up despite the lack of fundamental reasons, writes Julian Phillips of the Gold Forecaster.

We feel that you will benefit most from a look at what lies ahead for the Dollar and its fundamentals and what could take it higher, if it does rise.

The main reason a rally in the Dollar is being promoted is because it is due for a rally. The same is being touted for the Pound Sterling. It is certainly true that a price never moves in a straight line. It is also true that investors, buyers and sellers must see trade around all levels to ensure they are balanced and accept price levels as convincing. When the market sees a price 'spike' you can be sure that sellers will turn up to bring it down. The only time it stays there is when buyers and sellers feel that, that price is justified by them both.

However, please note that the price of the Dollar is the main fulcrum of the currency world, a currency, unlike a share that is traded by an exchange. So its price doesn't move by buyers dominating one day and sellers the next. It stays in balance most of the time. That is why its fall from $1.23 to $1.51 per Euro has been gradual. If it rises it is because of a distinct reason similar to a change of tide. So the concept of "just a rally" would not end the bull market for gold.

When the Dollar rises, gold traders on New York's Comex exchange sell gold in such a related manner as to try to establish a direct link between the Euro and gold. Silver follows. Of late we have seen that relationship broken and then followed again. As the Gold Price has risen it has also risen against the Euro, thus de-coupling from the Dollar. But the actions of short-term traders keep returning to the day-to-day moves of the Dollar against the Euro, perpetuating the belief that when the Dollar rises against the Euro, the Gold Price falls.

When the Euro was first issued it held roughly a 1:1 relationship to the US Dollar. Each Euro now trades at $1.4254, a rise in the Euro of 42.5% this decade. In that time gold has gone from $275 to more than $1200 an ounce, an increase of 440%. So do we now expect the Gold Price to move in line with the Euro? Why should it?

The Eurozone and the US are at similar levels of development, their economies are moving in a similar path. The Dollar and the Euro are paper currencies are of a similar structure and reliant on similarly driven central banks. They have the same economic and currency goals. They are relatively inter-dependent. What will ail the one will ail the other. Hence the rise of one against the other is similar to a race where one runner is slightly ahead of the other. They are in the same race and the performance of one is not detrimental to the other. But the Gold Price is in an entirely different race, going a different way, moved by different drivers. We believe that this Euro/Dollar and Gold/Dollar ratio will fall away over time, just as in the past the oil to Gold Price ratio fell away.

Of far greater pertinence is the attitude of Dollar surplus holders to the US currency. These Asian, Arab and Russian banks are caught in a cleft stick, knowing that if they sold their Dollar surpluses they would inflict losses on themselves in the process of undermining not just the US but the global economy. But each of these surplus holders is also in a different position regarding the Dollar. All of them are caught in the cleft stick, but in this they will react in different ways.

Opec oil producers are dependent on the United States for the security of their sovereignty. The House of Saud dare not reject pricing crude oil in Dollars, or they would lose the physical protection of the US, as would all those western and northern countries of the Persian Gulf. So they can only influence the Dollar oil price through energy supplies, ameliorating the state of the currency's value. However, this may be changing as a new Gulf currency may be used to price oil. If this does happen, then a major nail will have been driven into the coffin of the Dollar as the global reserve currency.

Russia needs to maximize oil income to keep itself economically sound. So it will accept the Yuan from China but won't reject Dollar payments from other countries. It is diversifying reserves as far as it can without damaging the Dollar exchange rate (such as the Gold Price, for instance), and would love to jettison the US currency, but for the sake of the value of its reserves and the stability of the world's currency markets, including the Ruble market, it won't. As one Treasury Official said, the Dollar may be our currency, but it's your problem.

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