Is this systemic failure, a reflection of such widespread disenchantment with financial markets, corporate leaders, investment advisers and accountants, that even good news is totally discounted? Some extremists have come to that belief, announcing, for example, their complete withdrawal from equities and switching into very long-maturity Swiss Confederation bonds. They are basically taking the views we have expressed for about two years, but raised them by an order of magnitude. We are not that pessimistic, although we do come to the same basic, defensive conclusion. Seeking returns must give way to asset protection, the dollar has entered a prolonged phase of weakness, and long maturities in Government bonds is the place to be. In fact, we recommend further lengthening over the seven years we suggested a month ago. Ten years looks appropriate for all currencies except Sterling (two reasons to stay at five years: the shape of the curve reflecting a shortage of long-term Gilts, and the possibility of a rate rise to tame the runaway housing market).

We rather see the current period of doubt as systemic weakness rather than failure, retaining a certain faith that market and democratic forces will eventually bring about the corrections needed. However, that requires time measured in years, just as rebalancing both the US and the world's economies will require years.

The days when the "Rest of the World" looked to the USA for leadership in all things political and economic have gone.

• Where is the credibility of an Administration that preaches free trade but sets up huge farming subsidies and steel tariffs, and speaks of international collaboration and justice while spurning the international consensus on the environment and on war crimes?…. Guantanamo Bay….?
• How can US accountants and financial regulators be taken seriously after the Andersen scandals and, worse, the resistance of the accounting profession to a principles-based approach over a rules-based system?
• What trust can be given to corporate leaders that so obviously put their personal avarice above all else?
• What hope can there be for system reforms under a President tainted by issues of insider trading and a Vice President associated with accounting fraud at Halliburton? These stories look set to run.
• How fast can the US economy find a new balance when the Administration does not even recognise the imbalances and thinks that low interest rates are all that is needed to turn an ailing economy around?
• How much power does the Fed really have over interest rates when so much credit creation is in private hands (banks' securitisation of debt) and semi-private (the mortgage agencies)?

These are indeed serious questions, making the above, extreme views about systemic failure at least understandable. If the world's "natural" leader proves wanting, it is up to others to take on the responsibilities. Digby Jones (Confederation of British Industry) has asked Japan to join the UK in "standing up to a failure of US leadership in the conduct of global business". What a pity he could not have made that plea to other countries in the European Union. For the moment the UK looks clean of accounting scandals. It appears that US companies wanting to reassure investors of their propriety are appointing UK-trained financial directors, just like the new Chairman of the Financial Accounting Standards Board, Robert Herz, who has an accounting degree from Manchester University). Long may the UK's accounting reputation last, for everyone's good!

Everyone talks about the reluctant moves in France and Germany to the "Anglo-American" business approach. The shortcomings of the "American" part are now glaring. Vivendi represented an example of espousing the approach, warts and all. At the other extreme, the reluctance of the German Government to let the market have its ways with Kirch, Holzmann and, now, Babcock, witnesses to the death throes of "Deutschland AG". If only Chirac has the courage he needs in France, and Stoiber is similarly brave when he takes over in Germany, then the European Union could at last pick up America's dropped mantle.

In Europe, the build up in euro cash as the dollar weakens will in the short term reinforce deflation (hence delays in raising interest rates and our lengthening); in the long run that money will seek a more lucrative home.

Systemic weakness is showing up in the bond market, too. Selling certain corporate and emerging-market bonds is proving more and more difficult, with some market makers calling a temporary halt.

The least gloomy spot in the world at present seems to be non-Japan Asia for both GDP growth and stock market opportunity. For fixed-income, however, countries like Korea and China just do not offer enough liquidity. So, for yield with measured risk, we are left only with Russia and Mexico, countries likely to be upgraded soon.

Recommended average maturity for bonds in each currency
Lengthen still further, except in Sterling.

Once again, after a short respite, a fresh accounting scandal (Merck's inflated revenues) has spurred a new wave of dollar selling. Mr. Bush's speech announcing stricter controls and more power to the SEC impressed nobody, not least because both the President and his Vice President have previously also been involved in insider trading or accounting fudges. As already stated, more and more investors are continuing to clean out their portfolios and flee into quality bonds or cash. In Japan, contradictory statements by Shiokawa (Mr. MoF himself) put into question the recent interventions by the BoJ. Our view is that the USD/JPY in the 115.00 to 117.00 area represents a USD buying opportunity for medium term purposes.

EUR/USD: A short test of 0.9730 has been seen, then back up again to test 0.9970. A clear break of 1.0030 would stimulate fresh EUR buying and bring the exchange rate quickly to 1.0250. Nevertheless, our expectation is for some consolidation in a broad 0.9650 to 1.0100 range for the time being.

USD/CHF: Same comment: in this uncertain market environment, the CHF remains king. Consolidation has been underway below 1.5000 with strong support coming in at 1.4780. The downtrend remains clearly intact, but a break of 1.50 could trigger some stop losses and open the door for 1.5150, 1.5300. Supports are at 1.4730, 1.4650 and 1.4550.

USD/JPY: The consolidation range USD/JPY 118/121.- has worked well so far, but with recent comments and the still very bearish sentiment towards the US, the support area at 117.80 is being challenged again. A weekly close below it would still be very USD negative and open the door for 115.50. We still believe that the Japanese cannot afford sustained JPY strength and therefore advise customers to buy USD in a 115.00 to 117.00 range.

EUR/JPY: The key support at 117.80 has been broken, but not on a weekly basis. So long as the rate stays below this level, the next important target is still 115.50. On the upside, 118.50 and 119.30 remain tough resistance levels. A very broad consolidation range of 114.50 to 119.50 is the most likely outcome.

USD/CAD: All commodity currencies continue to be well supported and, in light of bad news out of the USA, investors continue to look for alternatives. A weekly close below 1.5130 would open the door for 1.5050, 1.4980, and then 1.4850. Upside is 1.5250 and 1.5330.

AUD/USD: Consolidation in a 0.5500 to 0.5750 range expected.

GBP/CHF: The bottom of GBP/CHF has moved gradually higher and 2.2850 is acting as strong support now. A clear move above 2.3130 would send this cross in the direction of 2.3300.