With political uncertainty in the aftermath of the French and Dutch rejection of the European constitution, and stagnant growth and rising unemployment, most analysts are expecting the ECB to come to the rescue with a rate cut. However, recent weakness in the euro and sharp rises in the euro prices of both oil and gold suggest that the ECB's next interest rate move could be up, not down.

With euro zone inflation currently running at an annualized rate of 2.1%, just above the official 2% allowable ceiling, surging energy prices, higher import prices in general, and increasing cost pressures for local manufactures, will likely push this rate much closer to 3% in the coming months.

In the last two weeks, the euro price of oil surged from 38.70 to 45 euros per barrel, a 16.3% rise, surpassing 40 euros per barrel for the first time ever. During that same time period, the euro price of gold rose from 331 to 345 per ounce, a 4.2% gain, closing within five euros of the key 350 level, a resistance area which has capped every gold rally since the creation of the currency. A gold breakout in euros would not be well received by the inflation hawks at the ECB, and the bank's reaction should it occur, would not only be a major test of its credibility, but perhaps help determine its very destiny.

Rather then bowing to political pressure, the ECB could seize the opportunity to take the monetary high road. Instead of pulling an Alan Greenspan, and pretending that inflation does not exist, the ECB could position itself as being truly independent. Not only would such an action reverse the euro's recent slump, but it could establish it as the world's dominant reserve currency. Furthermore, the discipline of a resolute ECB would do much more to bring about reform in Europe then ratification of its proposed constitution.

The surge in the euro price of gold suggests that the recent strength in the dollar is more a function of euro weakness than resurgent confidence in the greenback. Concerned U.S. dollar holders seeking refuge in the euro are now reassessing their options. For them, going from the euro to the dollar would be the monetary equivalent of jumping from the frying pan into the fire.

For years gold languished, as those seeking an alternative to the dollar chose the euro as their preferred alternative. As more of the world's savors question the wisdom of fleeing one doomed fiat currency only to embrace another, gold may finally reclaim its role as the safe-haven of choice; ironically not as a result of a weak dollar, as most gold bulls have been expecting, but of a weak euro.