Easy Money >>> FOREX

Now that the furor over the US housing crisis/credit crunch has begun to subside in forex markets, investors have turned their attention to what is perhaps the second biggest threat to the Dollars long term health: the PetroDollar phenomenon. In short, the price oil is denominated in Dollars and many oil-exporting nations peg their currencies to the USD. Having found themselves awash in cash, such nations are beginning to ponder greater financial independence from the declining Dollar.

The anecdotal evidence for the declining importance of the Dollar among oil-exporting countries could not be stronger. Last week, the Forex Blog reported two developments. First, OPEC is considering altering the way oil contracts are settled, by pricing oil in a basket of currencies rather than in USD. Next, the members of the Gulf Coast Council are considering de-pegging their currencies from the Dollar, due to rising inflation and the increasing opportunity cost of owning Dollar-denominated assets.

Actual data, on the other hand, suggests that OPEC may be moving in the opposite direction, towards a greater dependence on the Dollar. The US remains the most popular destination for petrodollar investments, attracting 55% of all such investment capital. Europe comes in at a distant second, attracting just 18%. Plus, in the last year, oil money has been used to make several widely-publicized investments in American investment groups, including a recent $7.5 Billion investment in Citigroup by the Abu Dhabi Investment Authority.

The evidence is certainly nuanced. In all likelihood, OPEC will make good on Iran’s failed attempt to sell oil denominated in Euros by linking oil to a basket of currencies. In their own words, oil is being sold in a currency whose value was eroding by the day. At the same time, the US is still the home of the worlds best capital markets, from the standpoint of stability and risk. Thus, while its possible that some or all of the members of the GCC will de-peg their currencies from the Dollar, any relative decrease in Dollar-denominated investments is likely to be passive, rather than active.

BERLIN (Thomson Financial) - Euro group president Jean-Claude Juncker said he is not worried about the recent strong appreciation of the euro.

“I don’t see any reason to worrry about the euro, it has appreciated, not in a brutal fashion but slowly,” he told reporters on the sidelines of the informal meeting of European finance ministers in Berlin.

Juncker also spoke of the need for more transparency on hedge funds and said this will be a topic for discussion at the two-day meeting which starts today.

“There is a need for more transparency (of hedge funds) and we’re working on it,” he said.

jessica.mortimer@thomson.com

jkm/jlc

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News of rising inflation in the U.S. and cautionary comments from Federal Reserve Vice Chairman Donald Kohn had gold futures surging Wednesday.

Contracts for April delivery of gold closed $23 higher at $684 an ounce on the Comex divison of the New York Mercantile Exchange. The bullion exhange-traded funds that hold the metal, streetTracks Gold Shares (GLD) and iShares Comex Gold Trust () , were litfting also, up 3% recently.

The Labor Department says its consumer price index rose 0.2% during January, twice the consensus forecast of a 0.1% increase but down from 0.4% in December. The core rate, which excludes the volatile food and energy components, advanced 0.3% vs. expectations of a 0.2% rise, and up from 0.1% previously.

“The upside surprise in the headline and core number will keep the market a bit on edge until we get to see the [] deflator next week,” writes Joe Brusuelas, chief U.S. economist at IDEAglobal in New York, in a research brief.

The not-so-tame CPI data likely increased investor interest from those looking to buy gold as a hedge against a generally rising price level. Bullion had a significant downturn Tuesday, as spot prices dropped $10 in London.

But what really stoked things up appeared to be a comment from the Fed’s Kohn who said: “It would be imprudent to rule out sharp movements in asset prices and deterioration in market liquidity,” that could test the resiliency of the financial system.

Gold is also often purchased as a safe haven by investors during times of economic uncertainty.

The CPI data will likely also be bullish for the greenback because it reduces the near-term chances that the Fed will cut interest rates.

One dollar was recently buying 121.01 yen, up from 119.99 yen in the prior session. One euro was buying $1.313, down from $1.3139 previously. Gold tends to trade in the opposite direction to that of the U.S. currency.

Meanwhile, turning back to gold, the outlook from chart-watchers remains optimistic.

“We are at the upper end of resistance, and that gives a more positive shorter-term technical picture,” says Adolfo Rueda, an analyst at Natexis Bleichroeder in New York. He notes that prices are above their moving averages, which in turn are still trending upward. He believes prices could surpass last year’s multidecade high of $725.75 in short order, now that resistance at around $675 has been broken.

In the official sector, the European Central Bank says it sold 90 million euros of gold and receivables last week, or about 5.5 tons.

As for the action in the precious metals patch, the Chicago Board Options Exchange Gold Index was lifting 3.7%, pulled up in part by shares of component company Agnico-Eagle Mines (AEM) , which rose 5.1%. Shares of Kinross Gold (KGC) , also part of the index, were rising 4% recently.

Silver producer Hecla Mining (HL) reported improved profits, lifting the stock 9% in recent action.

Turning to base metals, copper contracts were up 6 cents at $2.66 a pound on the Comex. Consumption of the red metal in Asia is helping keep a floor under prices. “Chinese copper imports have accelerated due to inventory restocking,” states a weekly research brief from San Antonio-based money managers U.S. Global Investors.

Elsewhere, Friedman Billings Ramsey upped its price forecast on shares of Century Aluminum (CENX) to $55 a share from $47. The company reported lower losses after the close Tuesday.

In addition, Merrill Lynch raised its full-year earnings estimates for Century. But the stock barely moved, up 0.1% recently at about $49.