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

The twenty-year picture

While the past is not a reliable guide as to what the future may bring, it can give us an idea of what lies ahead. The chart below reveals one thing for sure: the USD-dollar has lost 30% against a basket of foreign currencies over twenty years, but not in an uninterrupted line of course.

We also note that after a sharp fall that touched bottom first at the end of 1988, sharp rallies followed, up and down. "This could be an indication as to what lies in store for us and we conclude that the present rally be my followed by a sharp reversal in the coming weeks or months.", we wrote on June 20 and it seems indeed that the reversal process has started to evolve.

The US Dollar moved through a significant down-trend line in March, setting in motion further buying activity.

By June, the RSI (Relative Strength Index) started to signal that careful forethought to avoid harm or risk was well advised. While the RSI does not tell how much is too much, it is certainly a good tool to tell when the risk to lose money has become bigger than the chance to make money.

In spite of the fact that in June many commentaries suggested that the US-dollar had to move higher because of rising interest rates, it started to weaken, a process that is likely to continue.

Fundamental considerations do not favour a strong US Dollar. The U.S. trade deficit, for example, rose to a record $ 57.0 billion in April as rising oil prices put the gap well beyond Wall Street expectations.

U.S. NATIONAL DEBT CLOCK

The Outstanding Public Debt as of 27 Aug 2005 at 05:44:27 AM GMT is:

The estimated population of the United States is 296,839,853, so each citizen's share of this debt is $26,749.90.

The National Debt has continued to increase an average of $1.70 billion per day since September 30, 2004! Concerned?

The medium-term picture

"The US Dollar Index faces two obstacles: on one side, the resistance zone as depicted above, and the overbought condition within the medium-term up-trend on the other side. Both suggest that a correction or reversal may be about to occur at any moment.", we wrote on June 20. Because hope is last to die, there as a surge to a little more than 90 points before the sellers moved into command.

The short-term picture

The short-term picture certainly reveals a change of sentiment. My mid-August, the US Dollar Index had in fact fallen to less then 87 points from where a rather feeble counter-movement got under way which ended at 89 points.

Once the Index falls through the 87 point level and stays there, it will take likely drop to the 84 point level.

Major support can be found around the lows of the beginning of the year.

"After analysing many other indicators, we conclude that the dollar cannot sustain this surge - in our opinion, it is just a bear-market rally.", we said on June 20 and added: "We think that it wise at this stage to take profit if you are long. If you are short, remain so even if you need courage to go against the flow."

For the time being, we would remains short.

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
www.timeless-gold.com
investment@pzim.com
forex@pzim.com

September 2, 2005

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