The currency's sudden tumble took many by surprise, writes Seán O'Driscollin New York

Tom Pawlicki, an analyst at Man Financial, said that last Friday was an "exceptional" day on the gold market.

The tension started on Wednesday when the White House announced it had to reassess GDP growth for next year because of the US housing slump.

The dollar began to fall and gold began to rise, but the momentum was slow.

Trading halted for Thanksgiving on Thursday and most traders and analysts took Friday off. It was expected to be a light day on the market.

But on Friday morning, Pawlicki noticed, the serious money started to pour in.

"In the gold market, there are really two markets. There are those we call the 'gold bugs', the ones who pile on whenever anything happens in the currency market. And then there are the normal players who came in very strong on Friday. You don't often see rallies that strong in one morning." He also saw big money come in from fund flows, which started to pour out of the dollar after the currency peaked in mid-October.

Even adjusting for the pre-Christmas demand for gold, something is clearly troubling in the dollar market. Despite recovering some poise this week with better than expected US growth figures on Wednesday, its first rise in six days, the dollar subsequently hit a new 20-month low against the euro of $1.3274 yesterday.

Significantly, the market paid little attention to the upbeat comments of Federal Reserve chairman Ben Bernanke, who appeared to take a tough line this week on "uncomfortably high" inflation.

Christian Dupont, a senior currency trader at Société Générale, said Bernanke's statement was vague on interest rates and offered little real hope of a hike to strengthen the dollar.

"If you look at the fifth paragraph of the statement, Bernanke leaves room for uncertainty. The statement was generally seen as simply trying to support the dollar. Had the Fed said something more passive, the dollar would have taken quite a beating," he said.

For Dupont, the market has simply lost faith in the dollar. "Even with positive US indicators on growth, the market shows a very minimal response. This is a sign that people have lost confidence in the currency."

He is, however, not prepared to run from the dollar, at least in the short term.

"I'm not going to join the bandwagon. I think it could weaken further but it's time to wait and see, time for consolidation."

But that's just the short term. The "medium term" for a high-volume day trader like Dupont is "about two weeks to a month", in which case he is "bearish" and doesn't see much to help boost confidence.

Samarjit Shankar, director of global strategy for the foreign exchange group at Mellon Financial in Boston, said the key to the entire phenomenon is the "growing realisation that the US is at the end of its rate-hiking cycle" and that rates are probably going to go down.

This is coupled with underlying doubts about US growth because of the poor housing market and unimpressive economic indicators in recent weeks.

The sudden tumble caught most people by surprise, he said, and the market will be looking for more gradual dollar losses in the future.

Shankar believes that there is pressure for an interest rate cut in the first quarter of next year and this is feeding into the lack of market confidence in the dollar.

However, he and other large volume traders have not written off the possibility of a confidence-boosting interest rate hike.

Volatile oil prices will play heavily into that scenario. A rebound in oil prices could lead the Fed to cut interest rates to counter inflation.

That still doesn't explain why the euro has been the recipient of such market largesse compared to the yen and other major currencies. "It's best to describe this as a dollar weakness rather than strength in other currencies," says Shankar.

"However, the euro has gained more definitely than the yen because of euro-specific factors." Most significantly, the European Central Bank is seen by US traders as "pretty hawkish", with a likely rate hike soon.

Wall Street also has confidence in the European economy, at least compared to Japan.

For Gary Dorsch, a former trader and now editor of the Global Money Trends newsletter, the co-ordination by the big three central banks - the US Federal Reserve, the European Central Bank and the Bank of Japan - shows they have done everything they can to pacify the market since last May.

Significantly, it was the Chinese who ended the stability, with recent statements showing little confidence in the dollar. The Chinese government is now seriously questioning its colossal $1 trillion holdings of foreign reserves, most of which is held in low-yield US fixed income securities, which China bought with money earned from exports to the US.

The deputy head of China's central bank warned in late November that US interest rates will fall in the long term and that there is little international confidence in the dollar.

Fan Gang, a key policymaker in the Chinese central bank, suggested as far back as late August that it may be time to China to look for alternative reserves. "The US dollar is no longer a stable anchor in the global financial system, nor is it likely to become one. Therefore it is time to look for alternatives," Fan warned. This is particularly significant as China was appealing directly to other Asian central banks.

As Dorsch points out, global central bank reserves have more than doubled to $4.9 trillion in just three years, much of it held by Asian central banks.

"The smallest hint of Chinese action against the dollar has sent the euro soaring and the effect might only increase in the future," he said.