Gold took a dive mid-way through Wall Street's morning session today, dipping almost $5 to $657.50 in the spot market.

That put it more than $1 beneath the PM Fix recorded in London only a few minutes earlier.

The move came after gold hit fresh 3-week highs against most major currencies.

Awaiting today's US interest-rate decision from the Federal Reserve, gold had risen above $662 for Dollar investors.

British investors looking to buy gold saw it reach £338 per ounce, as Sterling fell back in response to Gordon Brown's latest – and no doubt last – budget delivered to Parliament.

Against the Euro, gold touched €498 just as Frankfurt's traders grabbed their lunch today.

But on the currency markets, the US Dollar was also creeping higher – driven by expectations that Ben Bernanke and his colleagues at the Fed will defy the bond market and leave US rates on hold at 19:00 GMT tonight.

US Treasury bond prices fell in anticipation, even though options traded at the Chicago Board of Trade now show a 24% chance that Fed rates will fall three times this year to 4.50%.

Prices in the futures market forecast US rates of 4.75% by year-end – right where a Bloomberg survey of 73 professional economists also put the median forecast last week.

"There's a lot of concern about the Fed statement today," says one Seattle-based bond trader.

"[There's also] concern about a re-emphasis on inflation being a risk to the economy, which is bad for longer-dated securities."

In Frankfurt, the head of the European Central Bank (ECB) also warned on rising inflationary pressures today.

"The outlook for price developments over the medium term remains subject to upside risks," said Jean-Claude Trichet.

Following yesterday's news that inflation in the United Kingdom is running at a 16-year high, Trichet cited "stronger than currently expected wage developments."

Labor unions in Germany are now demanding the highest pay increases in more than a decade.

Bigger picture – and despite what short-term bond traders would like to see happen – Drew Matus of Lehman Bros. says the Fed will leave US rates unchanged for the rest of this year.

Bill Gross, head of the world's biggest bond fund, Pimco, agrees. In fact, he told Bloomberg today that he sees the Fed hanging onto its "tightening bias".

Gross believes lower rates are needed to ease the crisis in subprime mortgage lending. At some point, he says, Dr. Bernanke and the rest of the Fed committee will concede they need to ease monetary policy to fend off recession.

When that happens, "the safest place for investors," says Gross, "will be in the short-end of the [yield] curve" – where bond prices will rise fastest as US rates fall.

Until then, however, the risk of inflation looks likely to keep US rates on hold. Indeed, the Fed is already being "accommodative" with its lending rates.

Cutting rates now would only unleash a fresh round of E-Z money, driving all asset prices higher again – most especially gold.

Click here for a full report on how interest rates affect the gold price today...