Spot gold prices continued to climb throughout the Asian session today, before pulling back just after the European opening.

By the start of London dealing, gold priced in Dollars had reached $656 per ounce for the first time in more than two weeks. It then slipped below $655 in volatile trade.

Versus the Japanese Yen – which was weaker on the foreign exchanges after the Bank of Japan denied it will hike Yen interest rates again anytime soon – gold had already hit a one-week high above ¥77,000 per ounce.

At the Tocom derivatives exchange in Tokyo, gold for delivery in Feb. '08 rose 1.4% to close today's session at the equivalent of $665 per ounce. (For more on the impact of Japan's interest rates on global asset prices, click here and read on...)

Against Sterling and Euros, however, gold pulled back more sharply at the opening of European trade after rising in Asia.

Gold versus the Euro slipped to €492 per ounce. Versus Sterling it opened in London below £337 as the Pound rose to $1.9460 on expectations of further interest-rate increases ahead.

Sterling's gains were driven by news that asking prices for UK residential property rose more than 12% in the last year.

"The Bank of England will still have a tightening bias," reckons Stewart Robertson, an economist at Morley in London.

"It wants to anchor inflation expectations to the target – and at the moment, they're not."

City economists surveyed by Bloomberg expect Feb.'s inflation data to show a 2.7% rise from a year earlier – making it the tenth month of above-target rises in a row.

That should support the case for higher lending rates in the UK – making Sterling yet more attractive again to international currency traders in spite of Britain's weakening economy and shakey fundamentals (click here for the full story...)

Mortgage lenders, on the other hand, have already begun cutting their rates. Abbey, Alliance & Leicester, Bank of Scotland, Britannia and GMAC have recently knocked up to 0.3% off their fixed-rate two-year deals.

"More lenders are expected to follow suit in coming weeks," reports the FT.

The reason? Just as in the US, government bonds in the UK know have an "inverted yield curve", making it cheaper to borrow long term than for just the next few months.

Futures traders say the Bank of England will raise its rates to 5.5% early in April. The June contract was trading at 5.66% earlier today.

The 10-year UK government bond, on the other hand, began the week offering just 4.78% per year. (What can the Bank of England do to fix the mess it's created? Click here for more...)

Meantime, the bad news from the US subprime mortgage market continues to weigh on the outlook for Dollar interest rates.

"A wave of pessimism over the near-term outlook for the US economy continues to wash over the market," says Brian Dolan, director of research at Forex.com.

"The immediate catalyst appears to be continuing concern over the demise of the subprime mortgage market in the US."

But with the collapse of America's higher-risk lenders continuing to threaten the wider economy, Friday's inflation data puts a squeeze on the real returns being offered to US Dollar savers and investors.

That should drive fresh money into gold, which thrives when other asset classes fail to offer a decent rate of return. (Click here to read more...)