Over the last few weeks, we have tried to keep focused on what lies underneath the "fog of war", while avoiding sides in the debate between "pro" and "anti" war positions. This week we try to maintain our neutrality on the justification of war, but we feel obliged to consider the behaviour of political leaders and its likely impact on geo-politics. Before dealing with that topic, however, we note that the shifts in the fog of war are the dominant, if not sole criterion in determining stock market moves. What else can be concluded from the recent prices rises, when fundamentals have not changed by an iota?

Political behaviour on both sides of the Atlantic brings one word to mind: divisiveness. In every country there is vociferous part of the population opposing war, and another, quiet part, resigned to its inevitability. The UNO, EU and NATO are all divided. Whether the division should be seen as the "USA and friends versus the rest of the world" or "France and friends versus the rest of the world" depends on your political stance. To the extent that Saddam has so divided the West, he has already achieved a major victory.

For Jacques Chirac to scold the incoming EU members like naughty children may be likened to an own goal. He is seeking a powerful EU voice more or less dominated by France; he is likely to have made other Europeans cease taking his opinion seriously at all. Consider the EMU, for example. In the UK, Tony Blair has long been almost the sole highly placed voice speaking in favour of the UK joining the EMU. Yet he must now be backing away from holding a referendum he cannot win so long as joining the euro can be interpreted as yielding British sovereignty to France and Germany. The economic arguments in favour of joining may be strong, but they are lost under a fog, not exactly of war, but of politics.

Many commentators see the manoeuvring over Iraq as a sea change in world affairs, with even the UNO's and NATO's future relevance put in serious doubt. Our own view is that the influence of France in Europe, and of the USA in world, will both decline, as the rest of Europe/the world tires of being told what to do. Symptoms of this will include collapse of the (amazingly) pro-French Common Agricultural Policy (a litmus test of France's resistance to change) and a decline of dollarcentricity in world trade. Ironically the unsought-for strength of the euro is both cause and effect of the latter.

Divisiveness is apparent in the USA on economic policy. The "400 anti-Bush economists" have now been opposed by 250 "pro-Bushers". Greenspan goes so far as opposing tax cuts and deficits, but still hides behind a pretence that all will be well once the Iraqi war is over. He appears to seek any excuse to explain the eternal six-month delay in recovery. Any "cover" is welcome, so long as it hides the appalling state of the fundamentals and the US imbalances (pax, readers, we will not list them again!).

What does all this mean for investors? Stay defensive, focus on the euro and Swiss Franc. We still favour long maturities in euros, but understand full well that the risk of a sudden reversal of interest in bonds is pushing many investors to hold cash. By the way, on January 15, we wrote "The attraction of the Norwegian Crown as a fringe currency to the EUR may be shifting to the Danish Crown". It did! Be aware that it has lost 31/2% against the euro this year.

Among emerging markets, Russia is going from strength to strength, and Turkey looks only to benefit from US economic support in exchange for co-operation on Iraq.

Germany is unlikely to convince multi-national corporations that it is the right country to do business in when the Head of Deutsche Bank is threatened with court action over the Vodaphone/Mannesmann affair. Readers may enjoy the biblical words used in Ein Deutsches Requiem: ein Ackermann wartet auf die kцstliche Frucht der Erde und ist geduldig darьber. We suppose he has already received the fine fruits of earth and is even quite patient about them and the resentment they have caused!

UBS made a loss in the last quarter of 2002 (in the context of an excellent year overall), reflecting the pain of everyone in the private banking and fund management sectors as volumes under management decrease in favour of cash holdings. May the success of Alinghi continue and augur well for "Switzerland Inc.", but beware the likely outcome of an Alinghi final victory: a still stronger Swiss Franc and a less shiny Kiwi dollar!

Recommended average maturity for bonds in each currency

We maintain our recommendation for maturities in euro to average ten years.

EUR/USD: The single currency continue to developed in the wide band of 1.0650/1.0950. On a shorter-term view, the band is reduced to 1.0650/1.0750, and it should make a break one side or the other this week to begin the next move of at least 100 pips.

USD/CHF: Supported by 1.3650, the dollar would need to break rapidly and to close above 1.3850 to confirm a more significant correction (objective 1.4100).

USD/JPY: The greenback needs to pass 119.60 and 120.50 to avoid testing 117.50 again! Be aware that the BoJ could be in the market.

EUR/JPY: Broke all supports and should trigger 126.00. A break of 125.50 should open 123.50. Resistances are at 127.90 and 129.00.

GBP/USD: The key level is at 1.5850. A weekly close below it should announce a move of 200 pips! Resistance is at 1.6000 and 1.6150.

USD/CAD: Still narrowing. The key area support is at 1.5050/1.5000. Again, a weekly close below 1.5000 should announce a medium-term trend, with a 1.4200 target, but our preference would be for a return to 1.5600.

AUD/USD: Seems a little out of steam and unless there is a break of 0.5975, we rather expect a correction direction 0.5840 and 0.5775. Major support is at 0.5710.