The basic policy of the US Government is essentially that if they keep saying things are going well, all will be well, and all those claims from economists about the need to rebalance the economy are nonsense. The Government propaganda may yet prove successful and we doubters quite wrong. Nevertheless, our view on the fundamentals of the US and world economy must remain on the side of the critical economists. It is not a view of total pessimism, by the way. We entertain hopes in the possibility of traction at the end of this year, although we suspect that the signs of traction appearing now are not the real thing.

The neutrality of Alan Greenspan in his comments on the economy is now under suspicion. He made a first speech in January emphasising great caution. Then a number of other Fed Governors plus the Treasury Department began to contradict him. Accordingly, his second speech took on a more finely balanced tone, interpretable either way. So far, reassuring words from worthy officials have "worked": consumers have kept spending and stock prices kept relatively high. Now doubt about the reliability of "worthies" is growing. Enron was, of course, the seed for all the current doubts. "Are there other Enrons lurking?", was the first question. On cue, Tyco, Williams, PNC Financial, Enterys and Elan (for the US side of an Irish company) announced the need to restate earnings. From there, virtually all telecom companies and conglomerates were put under a "can we trust you?" cloud. Banks, too, are being looked at with suspicion as the facilitators of opaque structures. What "perfect" timing for Allied Irish to uncover a $750 million fraud by (apparently) a rogue trader at its US subsidiary, Allfirst. Again the question: where were the watchdogs?

We have long expressed our old-fashioned preference for share valuations that reflect equity risk and potential growth in earnings. Thus, in one sense, we look for a correction of US stock values as eliminating one of the imbalances of the US economy. Nevertheless, to see share prices fall because of the shortcomings of the watchdogs of the system is a source of dismay. The refusal of Cheney to reveal Enron conversations can only increase scepticism, just as the choice of Enron executives not to testify just increases the suspicion of wilful wrongdoing. Slight encouragement can be found in Andersen's CEO, Berardino, himself testifying instead of sending a subordinate. He is now calling for sweeping reforms of audit systems. Has a poacher turned gamekeeper? Was he not supposed to be a gamekeeper all along?

Interest rates have at least temporarily bottomed out, including in the eurozone and in Switzerland. A further cut or two during the year remains possible, but the best assumption now looks like no change at the short end and an eventual rise led by the long end if and when the economy improves. If the USA has a "double dip", then a further Fed cut is likely. Otherwise if recovery holds, its very anaemia should ensure rates being held down.

The biggest risk to this scenario of many months at low interest rates lies in the ballooning US Government deficit. So long as investors have so little else do with their money, the Treasury may borrow at the cheap, short end. However, there is a sword of Damocles overhanging the recovery if the Government has seriously to compete with the private sector for funds once recovery takes hold. This looks like a return to the "double deficit" economy of about ten years ago - not a happy thought.

Surveys in Europe show an increase in economic activity and a flattening of unemployment overall It is difficult to rejoice, however, when German unemployment has passed 4 million and the German internal deficit is approaching the 3% limit. How splendid that the EC has insisted on breaking up the restrictive practices of automobile distribution, opposed by (guess who), Germany. We would like to write more, and be more positive about Europe, but, like everyone else, we cannot take our eyes of the unrolling US situation, on which we are all so dependent.

Crisis deadlines come and go in Japan, the latest being enforced write downs of banks share holdings as the Nikkei moves towards 9,000. It is amazing that shares could ever have been kept on the book at purchase value and above market value. Not even GAAP would have allowed that!

Recommended average maturity for bonds in each currency
Bond investors should stay quite short and be extra cautious about seeking spread.

After the Enron debacle, the Global Crossing restatements and Tyco's hidden acquisitions, more and more investors are becoming concerned on the credibility of accounting practices in the US. With Argentina postponing again the opening its financial markets and in the light of its having announced a free float the peso, it is going to be interesting to see the impact on other emerging markets. In Japan, further downgrades in the banking sector are underway, and the Nikkei has hit an 18 year low. Not one day passes without hearing the Japanese PM affirming the need to act on the slightest sign of financial market instability. With the book closing at the end of March and a battered stock market, Japanese capital repatriation could bring about a temporary yen appreciation. Medium term, we are still looking for a substantially weaker yen.

EUR/USD: A weekly close above 0.8730/50 is needed to see the euro heading for higher levels again. The downside remains well supported at 0.8550, major support is at 0.8480, with a break looking for 0.8330.

USD/CHF: So long as the exchange rate stays above 1.6780, consolidation in a 1.6850 to 1.7250 pro dollar environment remains. A clear break either way would target the next movement of 200 points.

USD/JPY: The yen is trading in a consolidation range of 131.50 to 135.30 for the time being. A clear move below 131.50 would temporarily open the door, direction 130.00. Levels around 130.00 should represent a good buying opportunity for medium to long-term prospects, with our first target of 136.90, followed by 140, still valid.

EUR/JPY: We took the initiative of establishing 50% of a long EUR/JPY position at 114.50. We put a stop profit at 114.80 and are looking for a move higher towards 117.50.

USD/CAD: We keep our short position USD/CAD at 1.5955 with a S/L at 1.6300. Price objective is around 1.5650.

AUD/USD: The failure to break 0.5280 again puts the Aussie under pressure. A move below the psychological barrier of 0.5000 would be catastrophic and putting into doubt all bullish forecasts for a higher AUD at the beginning of this year. Price objective then would be 0.4850.

GBP/CHF: Extreme volatility will remain in this cross. 2.3850 is acting as major support now and 2.4450 as tough resistance. Only a clear break of either level would provoke the next movement of 200 points.