The U.S. Dollar Index is computed using a trade-weighted geometric average of six currencies. The six currencies and their trade weights are:

On September 17, 2003, we presented the chart below and commented: "We are most likely in the turn-around phase of the correction process and should we break below the previous low of 91.88, we would conclude that the major down-trend is indeed alive and intact."

As we now know, the major down-trend was indeed "alive and intact", as the US Dollar Index reached its lowest point at 84.56 on February 17, 2004, a fall of 12% since our last report.

The bear market rally of last summer lifted the US Dollar Index by 8%. This time, it has already reached 9%. Could this be a trend reversal or is this bear market rally simply becoming stronger because the preceding fall was notably above the previous ones?

The long-term picture

The long-term trend is definitely down. This is a simple fact.

The bear market rally so far has not exceeded last summer's.

The problems which have affected the US dollar for the past three years are in no way being solved.

The U.S. trade deficit, for example, rose to a record $ 45.96 billion in March as rising oil prices put the gap well beyond Wall Street expectations.

The US Federal budget deficit could reach $ 2.4 trillion over the next 10 years, $ 1 trillion more than previously estimated, according to official assessments.

President Bush says he will cut the deficit in half by 2009. Will he be there to live up to his promise? The cost of the occupation of Iraq is stated as $ 5.46 billion monthly, of which $ 1.56 billion is interest.

Warren Buffet is said to diversify his holdings into other currencies!

The medium-term picture

Our recommendation of last September to GO SHORT was very auspicious. This time, the situation is practically identical; at that time, the US Dollar Index had already fallen 3% from the highest point (99.49) while this time, we find ourselves at less than 1% from the high of 92.29 points.

The prudent way for anyone wanting to go short at this stage is to watch the resistance level between 93 and 94 and to put stops above in case the US dollar should keep pushing higher against our expectations.

The short-term picture

Short-term, it is evident that the trend is up and has not been broken. A close below 89 points would cause us to be more confident that the bear-market rally has indeed run its course.

Who is going to pay the debt?

The US Dollar Index has fallen 30% from its high reached in July 2001. 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 against their own currency.

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

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

Peter Zihlmann


www.pzim.com
investment@pzim.com
forex@pzim.com

May 21, 2004

Disclosure: The author has not been paid to write this article, nor has he received any other inducement to do so. The author is a shareholder in the company and will benefit from any increase in the company's share price. Disclaimer: The author's objective in writing this article is to invoke an interest on the part of potential investors in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information, nor the opinions expressed should be construed as a solicitation to buy or sell this stock. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock.