How curious to read so many commentators taking the line that we have been propagating for so long, that the US economy is bust. It is hardly surprising that a European commentator like "Independent Strategy" shares our view, or that Stephen Roach of MSI. does. We are, however, still bemused by the archetypal "gung-ho" Business Week publishing lists of reasons to doubt, identical to what we have been writing in this Weekly. None of this stops the stock market going up if it wants to! We can blame that phenomenon, using Roach's words, on "the romance of military victory being transferred to market emotion", concluding that the market bounce will run its course before bear markets return. Roach offers us five myths about the supposed recovery: the world is too US-centric, capital expenditure cannot recover with such low capacity utilisation, US savings are too low, deflation is still a risk and the rest of the world is in the doldrums.

Right! We are all agreed on that. Is there any hope somewhere? Our long held position that the euro is going up despite itself holds true, because Europe is stably stagnant as distinct from America being unstably dynamic. The Swiss franc and sterling are not going up with the euro, so those economies should be less stagnant. Russia is getting economically stronger, with the Yukos/Sibneft merger reinforcing that trend. Japan just may be doing something to solve its banking problem in opening up bank ownership to foreigners, apparently with some implicit guarantees.

Still the world is fixated on the USA, unable to believe that such a superpower could be an economic weakling, but all the time thinking that it might be. Thus, investors step gingerly into the stock markets, while covering their bets in fixed income. The traditional inverse relationship between equities and bonds has broken down, as has the direct correlation between the US dollar's value and the Dow. Part of the reason for the former is the growth of the credit derivatives markets, which have gradually been making investors in corporate debt more conscious of risk and of the possibilities for hedging. Besides, the world is in a post-war "search for yield" mode, causing spreads virtually everywhere to contract, and reinforcing the "high-yield" currencies of Canada, Australia and New Zealand.

A small dent to confidence in emerging markets has arisen this week with Jamaica's problems suddenly receiving attention. The internal deficit has reached 7.7% of GDP, part cause of the country's problems. We cannot but be reminded that a certain superpower to the north is heading towards figures like this!

Our recommendations on maturities stand, despite our concern about USD-denominated bonds. The bearish and deflationary scenario we expect would push us to lengthen, but our clients are shortening in dollars, presumable just in case the equity rally is for real.

Let us finish with the scenario we would expect to see if all governments did away with unreality:

• The dollar's weakness will lead to a US economic revival via exports
• Deficit spending in the USA in both the Government and the household sectors will allow savings to accumulate ready for investment in industry (that will take three to four years)
• Japan and Germany will reform to the point where domestic demand reasserts itself, both countries providing alternative demand motors to the USA
• Further demand for the world's goods and services will come from Russia and China as the wealth generated by these countries spreads through to their populations
• World trade is conducted in a sensible mix of US dollars and euros
• The UK steers clear of the euro and continues in both economic and political terms to build on its unique position between the USA and Continental Europe.

We believe in this scenario, because economic fundamentals eventually have their way. Readers who have been with us since early 2000 may recall what we said then, that it would take a full decade to rebalance the world economy after the bubble, a decade of poor returns and a weakening US currency. The decade is just one third through. "So far, so good", or, if you prefer, "so far, so bad!"

Recommended average maturity for bonds in each currency

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

EUR/USD: The 1.0760 pivotal point has been broken and is now acting as major support. Levels of nearly 1.1000 have already been tested. The euro retains its firm undertone against everything, with the next hurdle being 1.1050 followed by 1.1120.

USD/CHF: Levels above 1.4000 are unsustainable for the moment and represent a selling opportunity. Critical support at 1.3780 has been broken again, with 1.3680 as the next important level on the downside. A clear break would spell further dollar weakness, with 1.3640 and 1.3550 as the next targets. Upside resistance is at 1.3780, 1.3820 and 1.3850

USD/JPY: There is strong support below 118.00. Upside is at 120.80 and 121.10, with a weekly close above looking for 122.50. Trading in a range from 118.00 to 121.30 looks likely.

EUR/JPY: Breaking the psychological barrier of 130.00 took the rate directly to our first price objective of 131.50, with a high of 131.90 so far. The next resistance is at 132.30, 132.80 and 133.50. Big support comes in at 130.20.

GBP/USD: As last week, the key level is at 1.5850. Consolidation in a 1.5500 to 1.5850 range may be expected.

USD/CAD: The CAD remains one of the market's favourites. The strong support at 1.4550 has now been broken. The next supports are at 1.4420, 1.4350 and 1.4200. Important resistance is around 1.4720

AUD/USD: The break and weekly close above 0.6000 generated some fresh buying, and our objective of 0.6180 has already been reached. The next levels are 0.6230 and 0.6280. Big support is at around 0.6110.