Our long-term scenario has been consistent these last two years: the imbalances of the US economy must be addressed for the sake of the world's economic health. One of the imbalances is the overvalued dollar. On 29^th April, with all the caution of having been (at least) once bitten and therefore twice shy, we said that the dollar now looked like falling off its perch. Our argument was that the attraction of the US economy for foreign investors was wearing thin, and, without a capital counter-flow to offset the annual $400 billion current account deficit, the dollar must weaken. That argument is gaining weight among market commentators. The data on foreign purchases of corporate bonds speak volumes: at the peak of corporate bond issuance a year ago, a huge 90% of the take-up was by foreigners. That proportion has fallen below 30% and is headed still lower.

At the end of April, the dollar did indeed fall off its perch and is now fluttering lower. It is only "fluttering" because of the real absence of attractive alternatives. The yen is strengthening because of a widening Japanese trade surplus, but the unreformed state of the Japanese economy makes the current enthusiasm for Japanese assets look very much like the bubble we have seen before. So where might international funds be going if bearishness about dollar assets sets in? The answer is probably "a little bit of everything". "Everything" will include Europe, but with no great enthusiasm so long as French and German commitment to Maastricht and to a free-market economy seems weak. (Hence the significance of the forthcoming elections in these two countries.)

Unhappily for the Swiss Government and industry, it also means the Swiss Franc. This week, when stock markets everywhere were going through a downwards phase, the SMI went up. We cannot help thinking there was some "safe-havening" going on.

Long may the dollar flutter rather than fall, for the latter would be a wrenching blow for the world. For those of us who see the world rather like a drug addict dependent on US imports, it would be a severe case of "cold turkey". In contrast, a gently falling dollar, although painful for some, would imply a gentle weaning from the drug, beneficial overall. For the USA, it might reduce some of the hubris in Government circles. The policy of "spend, spend, never mind the debt" would not sit easily with higher import prices. For the rest of the world, the development of domestic economies would be given higher priority, as would trade with other countries.

The long-term reason for forthcoming dollar weakness is the hangover from the spending binge of the 1990s. The medium-term reason is the feebleness of the recovery: what recovery there is depends greatly on cheap money. Any serious economic expansion would induce inflation, which would push up rates and stifle growth. Our supposition is that inflation seems tamed (always assuming no oil-affecting armed conflict) and that interest rates will stay low, just because the recovery is so weak. In the UK, for example, the country with one foot in economic America and the other in Europe, April inflation has come in at 2.3% per annum. That is very benign when the target is 2.5% and suggests no change in interest rates. Our recommendation of bar-belling around 2007 still stands for the dollar and euro, while we think Sterling can safely join the Swiss Franc at an average bond maturity of 2007.

In our mind, "American imbalances" include the absurdities of "buy, buy, never mind the risk" recommendations for every stock in sight even when the analysts knew better, along with very dubious accounting and reporting practices. New York Attorney-General Spitzer has achieved a great deal in having extracted "guiltless contrition" from Merrill Lynch. The reforms that Merrill will implement will either become law or be adopted anyway by the whole of Wall Street. Then, provided such matters as off-balance sheet vehicles, smoothed out earnings and stock options accounting can be sorted out, confidence in the US investment world can return.

Argentinean debt has reached new lows and is still falling. The worst is not yet over for that poor country. The Argentineans' promised land must pass by a reduction of provincial power and civil service numbers, before the IMF will take them seriously. The peso, having fallen from parity with the dollar to 3.7, is today at over 7 in the one-year forward market. With the exception of Russia, other emerging market sovereign debt markets continue to come off their recent high valuations. Putin's policies and the gradual emergence of a new generation of business leaders ensures Russian debt remains attractive.

Recommended average maturity for bonds in each currency
Bar-bell in dollars and euros, fairly long in Swiss Francs and Sterling.

After last week's consolidation and the rally in the equity markets, profit taking among renewed fears of terrorist attacks pushed the stock market indices lower again. An improved economic outlook and growing surpluses in Japan has caused JPY appreciation, breaking the major support zone around USD/JPY 126.-, to test 123.50 so far. Verbal interventions by Japanese authorities are no longer sufficient, and the BoJ has had to intervene physically to weaken the JPY, direction 124.70. Doubts about the strength of the US recovery and growing deficits are feeding a negative sentiment towards the US dollar.

EUR/USD: The 0.9000 area remains the big support zone and the favourite game remains buying the euro on dips. The break at 0.9180 opens the doors for 0.9250, 0.9280 and 0.9350. A weekly close above the last level would stimulate medium-term oriented investors to turn bullish and consider buying more euros. Any weekly close below 0.8980 would lead to a big correction.

USD/CHF: The current uncertainty in the financial markets continues to privilege the CHF. Even the last two interest rate reductions by the SNB, specifically aimed at weakening the currency, failed to help. The 1.5950-1.6000 zone is now becoming the major resistance area and capping the upside. Our target of 1.5650 has nearly been reached, and 1.5500 would be next.

USD/JPY: Continued selling by Japanese exporters has pushed the USD/JPY below our major support zone of 126.-, while verbal intervention no longer helped stop the movement. After testing 123.50 today, the BoJ had to intervene to prop up the US unit. Consolidation in a 123.00 to 126.50 range may be expected.

EUR/JPY: The major support zone at 114.50 gave way and a huge wave of stop losses pushed this cross down to near our target of 113.00. Intervention in USD/JPY and the generally good behaviour of the euro pushed this cross back out the danger zone. 114.50 remains the key support, while the upside is 115.50, 116.30 and 117.00. A move below 114.50 again would leave this cross vulnerable.

USD/CAD: All commodity currencies have continued their rallies. The CAD broke key support at 1.5480 and nearly tested 1.5350. Next targets are 1.5280, followed by 1.5150. Topside attempts should be kept under 1.5500.

AUD/USD: The rally in the Aussie has continued and no technical correction has been seen so far, with 0.5500 taken out without any problem. Our target remains 0.5650, while the downside should remain well supported around 0.5450.

GBP/CHF: Sterling continues to be under pressure and 2.3250 is now acting as a very strong resistance. The first downside targets have been reached at 2.3000, followed by 2.2850.