On January 25, 2003, we presented the above chart and indicated a PRICE TARGET AREA.

We also stated: "The major trend clearly points downwards and an intermediate price target of less than 95 points could well be reached before this calendar year is over."

The US Dollar Index having fallen into the price target area of less than 95 points, it is only fair to ask again: "Should we still sell?"

So let's examine once more the long-, medium- and short-term picture:

The long-term picture

The long-term chart clearly shows that the US Dollar Index is in a down-trend which started at the beginning of 2002. On its way down from the triple top area around 120, we see three successive down-movements of a little more than ten percent, each followed by a consolidation lasting several months.

The triple top through which the Index worked its way between September 2000 and the beginning of 2002 clearly suggests a tremendous change of fortune for the US-Dollar. It also leads to the conclusion that the down-trend that followed is likely to be a bear market of significant proportions.

Reasons behind the dollar decline are easy to find as the imbalances within the U.S. economy have never been this large, nor has the current account deficit ever been this big and nor has the United States ever been more dependent on foreigners for oil.

Medium-term movements have more to do with patterns of human behaviour that with fundamentals.

Humans act on sentiments of fear and hope, but few have the capacity to control them. This is why past human action is indicative of what may happen in the future.

Judging from past action, a consolidation of the recent decline is likely.

The medium-term picture

Medium-term, we see the consolidation period from July to December of last year, a head-and-shoulder formation with the neckline broken in December, after a first attempt to break through failed in November.

After the consolidation from July to November of last year, the down-trend accelerated again, with a brief pause in March. At present, it can be observed that we have entered another pause in the down-trend as short-term minded traders play the hoped-for reaction to the recent slide.

The time is not presently ripe for aggressive shorting as this consolidation may last a few weeks or months. A pull-back towards 97 points would create better shorting opportunities.

The short-term picture

Short-term, it is evident that the down-trend has been broken and a small horizontal channel has become apparent.

Short-term range traders can try their luck here but medium to longer term traders should attempt to short around 97 or should the recent low of 92.21 be clearly broken, opening the way to the next down-leg.

Is the US-Dollar still fundamentally overvalued?

The U.S. current account deficit - a measure of the country's foreign borrowing needs - is expected to reach 6% of gross domestic product this year, while the fiscal deficit could surpass 3% of gross domestic product.

According to the Federal Reserve Bank of St. Louis, US household consumer debt is up more than 12% from last year. Debt service, as a percentage of disposable income, is above 14%. Only twice in the last 25 years has debt service taken as large a chunk of America's income -- and that's despite the lowest interest rates in fifty years.

As long as these trends worsen and are not corrected, the dollar will remain under pressure.

The US Dollar Index has fallen 23 % from its high. Think of all the foreign central banks (Russia, China, Japan, Taiwan etc.) holding huge amounts of US dollars as their reserve currency - a reserve which is continuously losing value versus their own.

Would it not be a logical step, alleviating fear, to diversify out of dollars?

The following recommendations were valid at the time of writing, viz. at

and may no longer be relevant at the time of reading.

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June 11, 2003

Disclaimer: P. ZIHLMANN INVESTMENT MANAGEMENT AG does not accept any liability for any loss or damage whatsoever, that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in the trading recommendations or in any accompanying chart analyses, whether communicated by word, or message, typed or spoken by any of it's employees.