By May 26, the US dollar had indeed fallen to 1.2776, or by 10% from the recovery high of the beginning of April, much in line with the previous down-movements.

Each time, a consolidation or correction followed, as investors and speculators cashed in their profits. Once again, it is important to correctly predict when to short the US dollar so as to benefit from the next, inevitable down-leg.

The long-term picture

Since the US dollar reached its highest point against the Swiss franc at 1.8309 in October 2000, we can count five waves down, each in the magnitude of about 10 to 15%.

Corrections followed these down-swings, which is a normal process in any long-term trend.

Comparing the actual correction with the previous ones, and this one having already reached 6% based on previous market action we deduce that this correction has about run its course.

It should also not be forgotten that the US Trade Deficit keeps expanding and that China, Korea, Taiwan, Hong Kong and Singapore are sitting on huge currency reserves in US dollars. There are clear signs that these reserves my by switched in part into EUR and gold.

Even by China’s standards, where startling economic statistics are the norm, the increase in the country's foreign reserves last year was mind-boggling.

China's central bank added US$74bln in foreign currency to its coffers in 2002, the equivalent of nearly the US's entire reserves. This brought China's total reserves to $286bln, second in the world only to Japan's $460bln.

Such a rapid accumulation of reserves is not unique to China. Central banks across the region have been stockpiling dollars. Asian countries, excluding Japan, added $153bln to their reserves last year, bringing the total to $927bln, more than 50 per cent of annual imports in most countries.

The medium-term picture

The following medium-term chart shows the present and the two previous corrections Medium-term, we can draw the conclusion that the present correction has not much life left.

Where it will end, we do not know exactly -nobody does. Using the past as a guide, we assume that the correction will end, in the worst-case scenario, somewhere in the range between 1.37 - 1.38.

The quarter point reduction of interest rates in the US may have disappointed those who expected half a point and consequently squared their short positions in the US dollar. Short-term traders hoping to make a quick buck in a day-trade sense their chance and help the dollar to recover from what is called over-bought positions, using different yard-sticks to measure such conditions.

China’s strategy over the past decade has been to keep its currency artificially low, boosting its exports and holding down imports. Chinese intervention, through massive purchases of U.S. dollars, has kept the Chinese yuan from appreciating despite large trade surpluses and investment inflows. By some estimates, the yuan (also called the renminbi) is as much as 40% below the value that would be set by the marketplace. That means that U.S. exports to China may be overpriced by as much as 40% and that Chinese goods in the U.S. would be underpriced by that much.

This is a critical factor in the huge U.S. trade deficit with China.

The short-term picture

Short-term, the consolidation that started at the beginning of the month of June seems to be drawing to an end, and we expect an eventual break-down from the area between 1.35 to .1.38 to test the support level dating from October 1998 when the dollar briefly dropped to 1.2725 and recently to 1.2776.

It may happen quickly, but it could also take several weeks. The massive trade and current account deficit balances the US has with the rest of the world makes a correction that would take the US dollar to a level exceeding 1.40 Swiss francs unlikely.

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

and may no longer be pertinent when you read them.

Yours sincerely,
Peter Zihlmann, www.pzim.com, or email to forex@pzim.com
July 2, 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.