A fresh round of buying reversed earlier profit taking which had pushed the price down as low as $697.70 in Asia. Gold was last quoted at $699.90/700.90 late in New York on Tuesday.

"People think the Europeans will buy more anyway because of a firm euro. Maybe that's the reason why people pushed it up," said a dealer in Singapore.

"I saw both buying and selling here. When the market moves in a very strange way, there's nothing new about it," he said.

As spot gold rose above $700, benchmark gold futures on the Tokyo Commodity Exchange rallied by a daily limit of 60 yen to 2,538 yen per gram.

Some dealers now expect volatile trading with investors likely to book profits at higher levels.

"I think there's a potential of volatility. It looks like until we are going to London, we may all struggle to get over about $703," said Darren Heathcote, head of trading at N M Rothschild in Sydney.

He cited support for gold around $686.

Traders said market talk that economists had urged China to quadruple its gold reserves to 2,500 tonnes from the current 600 tonnes had also spurred the rally, particularly in New York where the metal rose as high as $700.50.

China has the biggest foreign exchange reserves in the world at more than $875 billion and is the world's third-largest gold consumer.

But some dealers doubted China's central bank would buy gold at current high prices.

"We've been talking about China increasing its reserves for half a year and I doubt it that it's going to happen. People made use of this to push up the price last night," said a dealer in Hong Kong.

"The market is still in the upward trend but people are cautious," he said.

A weaker dollar has made dollar-denominated gold cheaper in other currencies. The currency has dropped this year partly owing to concerns about the U.S.'s large trade and fiscal deficits.

The dollar fell to an eight-month below 110.88 yen on Wednesday ahead of a Federal Reserve meeting that could signal an end to a two-year stretch of rising U.S. interest rates.

The euro was trading at $1.2770 , just below a one-year high of $1.2788 struck earlier in the week.

Platinum spiked to a record high of $1,258 an ounce as fund buying in Japan propelled the most-active contract <0#JPL:> on the Tokyo Commodity Exchange to an all-time high of 4,366 yen per gram.

Spot platinum was quoted at $1,235/1,240 late in New York.

Dealers said platinum's rise was driven by the view that Johnson Matthey (JMAT.L), the world's top distributor of the metal, will produce a bullish report on the market later this month.

The company is planning a report on the market to coincide with a platinum industry event in London that starts on May 15.

Palladium rose to $391/396 an ounce from $389/394 an ounce. Silver was steady at $14.44/14.54.

U.S. oil prices had lost up to over $1 on Monday after Iranian President Mahmoud Ahmadinejad wrote to his U.S. counterpart, but slid back as he made no proposals for resolving the row over Tehran's nuclear plans and Washington was dismissive of the letter.

Ahmadinejad, on a visit to Indonesia, said Tehran and Jakarta are committed to using nuclear power for good purposes, as Iran faced Western fears that its nuclear program is a cover for making nuclear weapons.

"The Iran letter turned out to be a non-event. Everyone had thought that it would have been the grounds for some negotiation and prices came off but now it is quite clear that the fall had been a knee-jerk reaction," said Tony Nunan, a manager at Mitsubishi Corp.'s risk management business.

"The short-term focus is now on the upcoming stocks data, particularly on gasoline inventories. If it builds as expected, then prices would probably drift lower but the downside will be limited as the market has been waiting for a dip to buy."

A Reuters poll forecast a 1.2 million-barrel rise in U.S. gasoline inventories ahead of the release of government data for the week ended May 5 later on Wednesday. But distillates stocks are expected to have fallen 300,000 barrels and crude inventories are seen down by 600,000 barrels.

Gasoline stocks, a major concern ahead of the U.S. summer driving season, are expected to stay high this month on an increase in production capacity as refineries return from planned maintenance, analysts said.

However, supplies are expected to be squeezed come June, when the driving season begins in earnest.

The U.S. government's Energy Information Administration (EIA) estimated that gasoline consumption will hit 9.4 million barrel per day (bpd) during the third-quarter peak demand season, up from 9.27 million bpd on-year, but down from its previous forecast of 9.43 million bpd.

Stalled talks over a United Nations resolution, ordering Tehran to halt uranium enrichment, posed nagging concerns about the geopolitical risks to oil supplies after European officials had worked on a package of rewards or penalties for Iran.

Risks to supply also persisted in Nigeria where militants, whose raids have cut oil exports in the world's eighth-largest exporter by a quarter, threatened to attack state governors from the Niger Delta region, accusing them of betraying their people's interests.

Asian Currency Unit

This is no innocuous academic exercise. Regional monetary units are a euphemism for a parallel Asian currency, an idea that has been around since the 1997-98 financial crisis and is now, for the first time, entering the realm of policy making.

Both Japan and China are extremely serious about it and are vying to take ownership of the project.

An Asian Currency Unit, or ACU, will be an index that seeks to capture the value of a hypothetical Asian currency by taking a weighted average of several of them. The weight for a particular currency in the index may be determined by the size of the economy and the quantity of its total trade.

What's the big deal with the ACU? Given the data, anyone can set up an index. It isn't that Asia is talking about replacing its national currencies with the ACU. A European-style single currency in Asia is at least decades away. The ACU is an accounting unit; it won't change hands in the physical world.

The ACU will start making a difference when it becomes the fulcrum of exchange-rate management in Asia. There is some sign that Asian nations want to do just that.

A New Peg

Korea, Japan and China agreed in Hyderabad to "immediately launch discussions on the road map for a system to coordinate foreign exchange policy.''

The ACU can help a lot in such coordination. It can become a basket peg against which any Asian nation can fix the value of its currency within a band. The ACU, itself, will float.

Why might the ACU work when the now-defunct European Currency Unit, on which the concept is modeled, didn't? One good reason, as noted by economist Barry Eichengreen of the University of California, Berkeley, is that Europe's need for a parallel currency was satisfied by the dollar.

The ACU may well emerge as a viable currency for denominating export invoices, bank loans and bond issuances if the dollar is no longer perceived as a safe storage of value.

So far, Japan has been driving the ACU concept. Haruhiko Kuroda, a former Japanese vice minister of finance and currently the president of the Asian Development Bank, was vigorously pursuing it. The ADB was going to start computing and publishing several ACUs sometime this year.

China in Control

One such ACU would have comprised 13 members, including the Japanese yen, the Chinese yuan, the Korean won and the currencies of Singapore, Malaysia, Thailand, Indonesia, Brunei, Vietnam, Cambodia, Laos, Myanmar and the Philippines. Another ACU would have included both the yuan and the Taiwan dollar -- and that would have been anathema to China. Nor would China have liked to peg the yuan to an ACU that was overly dominated by the yen.

Now China has taken control. While the research will still be conducted in Japan, Asean will take the decision on the composition of the ACU. While Japan is a member of this club, its influence is in decline. The association is now firmly under China's thumb.

While China continues to exhort the U.S. not to follow weak- dollar policies, it, like everyone else, can only guess about the longevity of the present global imbalances.

If there is a sudden collapse in the dollar, the U.S. appetite for imported goods may vanish. The Chinese export engine may seize up and its fragile banking system may collapse under a spate of new bad loans. The idea behind the ACU is to buy some insurance, however inadequate, against all of this.

Stalemate

With its "my currency is your problem'' attitude, the U.S. has made a negotiated settlement of global imbalances a diplomatic non-starter. China isn't willing to consider the U.S. argument that quicker appreciation of the yuan may prevent a costly adjustment later.

Once again in Hyderabad, Undersecretary Adams tried valiantly to get this message across to Chinese Vice Finance Minister Li. He was wasting his breath.

Li, as Adams noted wryly, "knows all my talking points.''

The seeming certainty of the rate decision, which will be announced around 2:15 p.m. local time, stands in contrast to the questions surrounding what the Fed might say about its future plans in its post-meeting announcement.

Some economists think the widely anticipated rate increase will be the last in a cycle dating to June 2004; others think the economy's momentum will force the Fed to push credit costs higher to keep inflation tamped down, even if officials take no action at their subsequent meeting in June.

The heightened uncertainty is also in evidence at the central bank and policy-makers are expected to step back from guidance they offered after the last rate hike in March that "some further policy firming may be needed."

"The trick will be to choose language that prevents the market from finding guidance in the statement where none is intended," economist Lou Crandall of Wrightson ICAP said in a note to clients. But Crandall added the Fed would "have to be careful not to soften the language too much for fear of appearing to signal that the tightening cycle is over."

Economists at Goldman Sachs said carving out room for a possible pause after foreshadowing rate hikes for the past two years poses "an unprecedented challenge" for the Fed.

Bernanke told Congress two weeks ago the Fed could pause at some point, even if inflation risks were not entirely balanced, in order to assess incoming data and get a clearer sense of the economy's path.

He said, however, such a pause would not preclude further rate moves and economists expect the Fed's statement to indicate a willingness to continue to push rates higher.

"We believe the rate hike on Wednesday will mark the last of the current tightening cycle, but even if we are right and the Fed does move to the sidelines, it deliberately will not tell us the tightening cycle is over," David Rosenberg, North American economist at Merrill Lynch, wrote in a research note.

The difficulty of the Fed's task is underscored by the tension between the central bank's forecast of slower growth ahead with recent signs of bubbling inflation pressures.

The Fed's favored core consumer price gauge rose a stiff 0.3 percent in March, pushing the 12-month increase up to 2 percent -- the top of Bernanke's comfort zone. It appears inflation expectations are drifting up as well.

However, in a potential sign of slowing economic growth, the U.S. economy created only 138,000 jobs in April, far fewer than analysts had expected.

The company also has said that it expects an upcoming internal report to show that its financial controls remained insufficient as recently as the end of last year.

"We have substantially completed a comprehensive review of our accounting policies and practices in order to determine whether these policies and practices are consistent" with standard accounting principles, Fannie Mae said in its filing Tuesday with the SEC. "Restating our financial statements is requiring a substantial amount of time and resources because the restatement entails significant complexities."

The company's president and CEO, Daniel Mudd, said in a conference call with analysts: "We've made progress. We've got some more to do."

Mudd acknowledged that the $800 million or so that Fannie Mae expects to spend this year on the massive reworking of its accounting was "quite frankly, higher than I can stomach."

Washington-based Fannie Mae said the newly disclosed accounting errors involve transactions in its business of buying home mortgages from banks and other lenders and bundling them into securities, and the guaranty fees it charges the banks and other lenders. The company said it could not yet determine the effect of the errors on its financial situation.

Similarly, Fannie Mae in March disclosed new accounting problems that had been uncovered in several areas, including loans, investment securities, houses acquired through foreclosures, interest on delinquent home loans, and reverse mortgages.

They all are in addition to the accounting-rule violations that came to light in September 2004 involving derivatives, the financial instruments Fannie Mae uses to hedge against swings in interest rates, and its mortgage commitments.

Fannie Mae, which is the second-largest U.S. financial institution after Citigroup Inc., also said Tuesday that it has reduced its estimate of the impact on the bottom line of the Gulf Coast hurricanes, to between $170 million and $280 million from the earlier estimated $250 million to $400 million.

The loss stems from Fannie Mae's guarantees of timely principal and interest payments on home loans and from its investment holdings of securities that are tied to mortgages in the areas affected by Hurricanes Katrina and Rita. Fannie Mae and its smaller government-sponsored sibling, Freddie Mac, suspended for several months foreclosures on homes in the hurricane disaster areas for mortgages they own.

Fannie Mae and Freddie Mac were created by Congress to pump money into the $8 trillion home-mortgage market to keep interest rates low. They buy and guarantee repayment of billions of dollars of home loans each year from banks and other lenders, then bunch them together into securities that are resold to investors worldwide.

Freddie Mac, which had its own accounting scandal in 2003, has said that it will report its financial results for 2005 this month rather than in March, as previously planned, because it needed more time to institute a new method of valuing some assets. In March, Freddie Mac estimated its 2005 income at $2.5 billion, down from $2.9 billion in 2004.

Ken Tower, chief market strategist for Schwab's CyberTrader, said investors appeared increasingly optimistic about the market, especially after stocks held onto their sharp gains from the end of last week.

"People became much more bullish on Friday morning, and the fact they didn't sober up over the weekend is a very positive sign for the market," Tower said. "Of course, everything depends on the Fed. But at least for the moment, you have to look at the market in a positive light."

Dell said its first-quarter sales and profit will miss prior estimates, hurt by discounting as it fought to keep pace with competitors. Meanwhile, solid April sales at McDonald's Corp. were helping the Dow's advance and countering a rise in oil prices.

The Dow rose 55.23, or 0.48 percent, to 11,639.77. The index of 30 blue-chip stocks is 83 points from its all-time closing high of 11,722.98, reached Jan. 14, 2000.

Broader stock indicators finished mixed. The Standard & Poor's 500 index added 0.48, or 0.04 percent, to 1,325.14, and the Nasdaq composite index slid 6.74, or 0.29 percent, to 2,338.25.

Bonds drifted lower ahead of the Fed's meeting, with the yield on the 10-year Treasury note rising to 5.13 percent from 5.11 percent late Monday.

The dollar also weakened against the Japanese yen as the market worried about higher interest rates affecting the amount of credit flowing into the U.S. economy. Meanwhile, gold prices soared to $700 an ounce as investors looked to hedge their losses, said Peter Schiff, president of Euro Pacific Capital.

Crude futures marched forward amid persistent concerns about Iran's nuclear arms program. A barrel of light crude added 92 cents to settle at $70.69 on the New York Mercantile Exchange, where gasoline rose 4.3 cents to $2.047 a gallon

Wall Street had little reaction to a lower-than-expected rise in wholesale inventories. The Commerce Department said inventories grew just 0.2 percent in March after swelling 0.9 percent the month before, below estimates of 0.5 percent.

Dell plunged $1.23 to $25.20 on its warning. The news also weighed on chipmaker Intel Corp., which fell 21 cents to $19.90.

After the closing bell, networking equipment maker Cisco Systems Inc. posted a slight drop in earnings despite revenue swelling 18 percent. Cisco lost 8 cents to $21.68 in regular trading and slid another 25 cents in after-hours activity.

Deutsche Bank lifted GM one notch to "hold," citing recent moves to generate liquidity and progress with its restructuring. GM rose $2.25 to $25.80.

McDonald's posted a 6.2 percent jump in global same-store sales, led by gains in Europe and the United States. McDonald's added 44 cents to $35.83.

Residential mortgage lender Fannie Mae said more errors have been uncovered in the government-ordered review of its accounting. Fannie Mae nonetheless rose $1.38 to $51.52.

Declining issues trailed advancers by 17 to 16 on the New York Stock Exchange, where preliminary consolidated volume of 2.26 billion led the 2.24 billion shares that changed hands Monday.

The Russell 2000 index of smaller companies fell 0.88, or 0.11 percent, to 780.72.

Overseas, Japan's Nikkei stock average lost 0.58 percent. Britain's FTSE 100 gained 0.63 percent, Germany's DAX index rose 0.21 percent and France's CAC-40 was higher by 0.56 percent.