Last night it was the Australian dollar that sank as traders in Australia sold off their currency when it was announced that the domestic economy rose just 0.1 percent in 4Q04, leaving economic growth just 1.5 percent Year Over Year (Y/Y) there.

In spite of the very slow growth, however, the central bank of Australia interestingly raised its discount rate 0.25 percent to 5.50 percent. The key rate was increased in order to protect the currency, but it still sold off.

It seems the Australians are more concerned about rising commodity prices, rising wages and slowing productivity growth than slowing economic growth, so their central bank is tightening.

But these events, i.e., slow economic growth and flattened yield curve plus rising prices, are indicative of stagflation.

Recently other countries like Canada, Germany and Japan have experienced economic slowdown, but the central banks there did not raise the discount rate, which has served to weaken their currencies and strengthen the USD. That in a nutshell is why gold has fallen back.

But the reality is that global forex traders are now all on Greenspan Watch. The USD is at the fulcrum point where it appears to be ready to go one way or the other, depending on the actions of traders, which in turn will depend on their assessment of Greenspan.

First off, forex traders do not accept the latest U.S. CPI number, which was reported up just 0.1 percent. The American public may accept it, but forex traders believe many of the economic reports coming out of Washington these days are a pile of horse manure.

Yesterday, the Institute for Supply Management's monthly manufacturing survey was disappointing as to employment, and they are watching for the non-manufacturing survey results. If that too is weak, then Friday's key Jobs Report will be a bad one, and that dear readers will cause the U.S. equity markets to sell off dramatically " probably by a couple hundred Dow points.

But with commodity prices continuing to rise, the USD has no place to go except down, hard unless Greenspan gives indications in his testimony to Congress starting at 10am this morning that he's going to raise the central bank rate more than expected. That's not very likely as the discussion is likely to stay focused on Social Security issues.

So, the bottom line to forex this week is that traders are standing by, ready to sell USD depending on Friday's U.S. Jobs Report and Greenspan's signals re the upcoming Fed rate developments.

Gold traders will be watching too, and ready to put their foot to the gas when the EUD:USD cross rate crosses above 1.3250. Overnight the rate actually fell 0.5 percent to 1.3006 presently, but I think it will hold at about this level, and move back up over the crucial 1.3250 level today or tomorrow.

The pullback yesterday and this morning in gold bullion prices could then very well be providing the buying opportunity they have been waiting for. Thursday afternoon's put and call option trading in the goldminers will give the best indication how these events are going to play out.

I continue to believe that gold is poised to rise to the $475 level because I just cannot believe that the USD strength can be sustained regardless of how much the currencies in Australia, Canada, Europe and Japan have weakened. In fact the only reason I give for strength in the USD is that too many Americans are buying lemonade from Washington and media personalities like Larry Kudlow. They are not watching the yields on the 10-year and 30-year Treasury debt, which are reacting faster to inflation than Greenspan.

And that is going to make for a difficult couple weeks for stocks and bonds in the U.S., but not for gold, unless Greenspan tightens harder here than the politicians he is speaking to today are going to want to hear.

BCara@BillCara.com