Gold as the Crystal Ball

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But, fast forward to April 22, when the euro rose above $1.60 for the first time ever and the relationship falters. Gold failed to show a strong reaction to the currency move, staying some 10 percent below its high and as oil ran towards $120 . If the link between gold and the dollar remains as strong as it has been, then currency traders could be well advised to lighten their euro positions.

"If you look at the gold rally from the latter part of December through until March 17 -- that took off a good month before the euro/dollar move came," said Simon Derrick, head of FX strategy at Bank of New York Mellon.

"You then have the turnaround in gold on March 17 coming almost a full month before euro/dollar hit its peak -- it's almost as though you have moved to a situation where gold is acting as a leading indicator," he added.

Gold bugs and bears are split over whether the recent falls are just a temporary blip in an overall seven-year uptrend. But some of the factors behind the drop have a particular resonance for euro/dollar. Commodities, including precious metals, have prospered in a fear-charged atmosphere during the credit crunch where volatility spiked and the rug was pulled out from under other asset classes. The MSCI main world equity index tumbled just under 20 percent between November and January.

Despite further fall-out from the credit crunch as banks unveil the extent of their losses, stocks are now challenging four-month highs. Indeed April was the best month for global equities since December 2003. Meanwhile, the dollar has tentatively recovered from its lows, hitting a one-month high versus the euro and 2-month peak against the yen last week. Measures of market volatility are also easing.

"If volatility remains at moderately low levels and there's scant market demand for safe havens, then gold may tend to lead euro lower," UBS strategist Geoffrey Yu said. "Gold is the riskier asset. Out of the two it's less liquid, it's more volatile. Once markets receive new information and they want to adjust their positioning, the knee-jerk reaction would be to get out of gold first," he added.

Another key support of the euro and gold is also looking wobbly, as fledging signs of easing inflation pressures emerge in the euro area.

"The gold correction reflects a diminution in inflationary concerns. It's not obvious in the euro zone yet but certainly the break even inflation rates in the U.S. are quite stable," said Steve Pearson, chief currency strategist at Bank of Scotland Treasury services.

He also noted a sizeable rise in Treasury yields, partly due to the idea that U.S. interest rates might bottom at 2 percent. The ECB's inflation busting rhetoric may well be on the verge of being tweaked this week after a recent run of poor data that could see bets for an eventual rate cut increased. A weaker than expected reading of the German Ifo Index, slowed German consumer price inflation, a fall in French consumer confidence and Spanish retail sales were seen a sign that the euro zone was not immune to troubles faced by the U.S.

"We see euro/dollar going lower as people have been going into euro as a hedge against dollar weakness. If the euro zone is going to start offering lower yields then people are going to reassess their positions," UBS' Yu said.