So much for our forlorn hope that the downward adjustment to the dollar would be a nice, controlled affair! The problem with vicious circles is that they are - well - vicious. WorldCom's admission of accounting fraud is another nail in the coffin of investor faith in corporate America. Andersen's claim that they did not know about the misstatement is all too believable, although just how any one who claims to be an auditor can fail to verify the valuations of assets (in this case "capitalised expenses") beats us. It is a grim choice when we have to decide between connivance and incompetence in the audit profession, for, although Andersen are dead and all but buried, the stench spreads far. The whole audit profession needs to work hard to re-establish its integrity.

It is worth reflecting on what will happen to WorldCom, still the leading owner of IP networks in the USA and elsewhere in the world. With its share price expressed in cents, and laying off 17,000 people immediately, the very survival of the company is in serious doubt. Conceivably WorldCom can be bought by another telecom company, but who among the BTs, FTs and DTs of this world is likely to have the courage, even at a knock down price? No one will be prepared to take on USD 30 billion of debt. Perhaps someone will buy the assets and let the creditors go hang. The latter include a long list of banks with exposures measured in $ 100s of millions. Knock-on effects in the banking world are inevitable. Beyond that, if WorldCom is taken over for a song, the new owners will have a 65-country network with very little need to charge high connection fees to cover debt servicing and depreciation charge. The temptation of WorldCom Mark II, with a much less expensive asset base, will be strong to go for market share through lower prices. Watch for knock-on effects on other telecom operators.

Downgrading of telecom ratings continues unabated, at great cost to the companies as they face higher coupon rates. The power of the rating agencies is huge, even if they often confirm what the market has already decided. They hit Abbey National a fortnight ago. Yet, press reports suggest the warnings about inadequate risk controls in Abbey's treasury division go back to the mid-90s. Whom will the rating agencies hit next? Could it be the Landesbanks? While we are well aware that independent rating is a necessary service, we would question the agencies' power, their de jure oligopoly (just three approved by the US Government), their protection from prosecution (moral hazard if ever there was one!), and the whole basis of the company being rated also being the paymaster. Our sense is that the way rating agencies operate needs to be part of the revamp of financial governance that the USA and other countries have to go through.

In recent weeks we have been very critical of the USA and its Administration for "artificiality". That word reflects how the investing world is now perceiving the USA, both economically and politically. We choose our words carefully, well conscious of the range of views of our readers, but the fact is that the Bush speech on the Mid-East cannot be perceived outside the USA as even-handed. Even Blair has had to distance himself from it.

The UK in the meantime will have a serious decision to make about Europe. While the USA rode high, it was nice to hang onto its coattails. As the pound follows the dollar down, there will come a point when attaching it to the euro will look attractive. Politically, too, the UK is siding more with Europe, and not just over foreign policy, but also over such vital issues as protectionism and farming subsidies.

We have been saying stay long in bonds and in quality. At such times, that is the only place to be.

Recommended average maturity for bonds in each currency
No change since 12 June.

The climate on the equity markets remains extremely tense. The recent drop in US consumer confidence, with the tax cut benefits already out of the way, has renewed doubts about the strength of the recovery. On top of that, the credibility of the US accounting system is once again under question, with WorldCom in the spotlight after Enron. Fresh business investments are now likely to be postponed further, until a clear sign of a pick up in consumer spending is seen. However, a lower dollar might help the USA to correct its trade imbalances, while a higher euro is probably delaying any immediate rate hike by the ECB to keep inflation under control.

EUR/USD: Corrections have remained minor so far. After 0.9540, 0.9650 and 0.9850, the exchange rate has now reached 0.9940 so far. The next levels are 1.0020, 1,0100 and 1.0220. Downside, the first support comes in at 0.9850, followed by 0.9750.

USD/CHF: One way traffic, the 1.5500 level has been broken; gone also are important chart levels at 1.5300, breaking the medium and long-term up-trend of the dollar. A level slightly below 1.4800 has been reached. Support levels are at 1.4730, 1.4680 and 1.4550. Upside resistance is at 1.4930, 1.5000 and 1.5150

USD/JPY: As mentioned last week, the protected zone by the BoJ at 122.50 did indeed give away and sent the dollar immediately down to 120.--. The exchange rate is nearly 119.00 now, and next supports are 118.50 followed by 117.80. It has to be seen if the BoJ is still eager to buy the USD to weaken the JPY in a now obvious USD bear market.

EUR/JPY: Same comment: key support at 117.80 is holding for the time being. The outstanding high of 119.50 has been retested a couple of times. Consolidation in a 118.00 to 120.00 may be expected.

USD/CAD: All commodity currencies continue to be well supported. After testing levels in the high 1.54's, the downtrend has continued, breaking 1.5300 easily to reach nearly 1.51. Next levels are 1.5030, 1.4980 and 1.4910. Topside is 1.5180 and 1.5250 and 1.5330.

AUD/USD: Same comment: the target on the upside is 0.5730 followed by 0.5780. The downside should remain well supported around 0.5650 and 0.5500.

GBP/CHF: After touching levels above 2.3100, the GBP broke key support at 2.2850 and has reached levels around 2.2600. The next support levels are at 2.2550 2.2480 and 2.2300. Upside, 2.2850 is acting now as major resistance.