The twenty-year picture

While the past is not always a reliable guide as to what the future may bring, it can give us a hunch of what may lie 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 August 27 and it seems indeed that the reversal process has started to evolve.

So let us examine in more detail what could be the future direction of the US dollar against the basket of currencies displayed above.

The long-term picture

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

By June 2005, the LOSC (Line Oscillator Index) gave a clear sell signal the same way it did one and two years earlier and as can easily been seen, it told in fact accurately in advance what the next movement would be.

Today, the situation is a bit different as the US dollar is not as clearly overbought as it was at the beginning of last summer but can still be compared to the one we went through in 2004 before the dollar caved in to a new low.

Fundamental considerations do not favour a strong US Dollar. The U.S. trade deficit, for example, rose to a record $ 59.0 billion in August as rising oil prices put the gap well beyond Wall Street expectations.

U.S. NATIONAL DEBT CLOCK

The Outstanding Public Debt as of 29 Oct 2005 at 05:56:11 AM GMT was:

The estimated population of the United States is 297,536,829, so each citizen's share of this debt is $26,953.60. This debt per citizen increases by about $ 100 each month.

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

Current Monthly Interest $29,362,500,000 (average for fiscal year 2005)

You should not forget to add the private debt!

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.

Today, the situation is a bit different as the indicators signal a less overbought condition. Nevertheless, the resistance level has so far been able to hold back any further advances of the dollar and has lately gone through some bouts of weakness.

The double top which has been in the making since last June seems to foreshadow further weakness.

Following are the twelve months forecasts for the US dollar against the Swiss franc:

Does above table tell us anything worth knowing? Do these forecasters know anything we do not know? Of course not! Some forecasters will looking smart a year from now, and some foolish. And the following year; the fool may turn out to be smart.

The short-term picture

While during September the US dollar had been attracting some sustained buying due to the perspective of higher interest rates in the US, October shows a reversal of sentiments which seems to us significant. Even the dollar bulls do not believe in a long-term recovery of the US dollar in the face of mounting deficits. Short-term, it is not so much a question whether the dollar will fall again, but WHEN. It could be imminent.

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
investment@pzim.com
forex@pzim.com

November 1, 2005

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.