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 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 US-Dollar has lost more than 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.

We wrote in November of last year: "This could be an indication as to what lies in store for us!" and we concluded that the present rally (2005) may be followed by a sharp reversal in the coming weeks or months." And indeed, in December of last year, the US-Dollar started to resume its down-trend.

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 2005, setting in motion further buying activity, also supported by a trend towards higher interest rates in the USA.

During the summer months, we registered a first peak at 90.77 followed by a second, higher one, at 92.63. At this stage, the US-Dollar sold off again, recovered again, but did not manage to go above 92.63.

"A classical head-and-shoulder pattern emerged which is now complete and promises further down-side pressure for the US-Dollar.", we wrote in our Follow-up No. 8 dated May 26, 2006.

While many remained bullish for the US-Dollar, our prediction has come true and further US-Dollar weakness has an increasing chance to become true.

Fundamental considerations do not favour a strong US-Dollar. The problems remain and interest rates in the USA are unlikely to move much higher in the near future. As the US-economy shows signs of weakening, driven by a crumbling housing market, interest may even start to fall.

In Europe, the tendency towards higher rates persist, helping the EUR to move higher while the GBP has already reached the high of December 2005 against the US-Dollar.

U.S. NATIONAL DEBT CLOCK

The Outstanding Public Debt as of 29 Nov 2006 at 10:25:55 AM GMT is:

This represents an increase of USD 279,993,425,260 since May of this year.

The estimated population of the United States is 300,342,479. So each citizen's share of this debt is $28,734.89. or $775 more than just six month ago.

The National Debt has continued to increase an average of $2.03 billion per day since September 29, 2006!

You should not forget to add the private debt!

The medium-term picture

"This reversal pattern suggests that it is highly unlikely that the US Dollar Index will move back to a level above 90 points. As a matter of fact, the drop through the neckline of the formation down to the level of less than 84 and the subsequent pull-back towards 86 points, at which new selling pressure emerged, would favour a further decline to much lower levels." What we wrote in May has now been confirmed. In fact, the double top at 87.30 set the stage for the present decline.

Last November, we gave you the twelve months forecasts for the US-Dollar against the Swiss franc of five major banking institutions with an average target of 1.22. At the moment of writing, the exchange rate is 1.2083:

Possible you should ask CREDIT SUISSE and SARASIN why their forecast were so much off the mark.

The short-term picture

"For the time being, we would remain short.", we wrote in November of last year and now we have even less reason to change our opinion.

The 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
invest@pzim.ch

December 1, 2006

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.