Throughout 2004, we held strongly to our view that the US dollar needed to decline. Only in October did the US dollar break decisively lower.

The main rationale for our view was the huge current account deficit in the US, which required foreign investors to send USD 1m per minute to the US in order to support the US dollar†. We doubted this would be either sustainable or desirable. After the US Presidential election, it became increasingly clear that the US authorities were happy to see the USD decline, notwithstanding its lip-service to the ‘strong dollar policy’.

This outlook has not changed. Naturally, we have seen increasing signs from both Japan and Europe that they are uncomfortable with their currency strength due to the implications of this on their already struggling economies. However, the US does not appear to be listening. Whatever currency market consensus there was amongst policymakers seems to have broken down.

Asia is also an increasingly important player in the overall picture. As a main financier of the US current account deficit, it will largely determine the form and pace of US dollar adjustment. China is of particular importance due to the signal that any revaluation of the Yuan would send to the rest of Asia. Chinese authorities are keen not to move too aggressively on this front, but even a slight appreciation of the Yuan would likely lead to significant further currency appreciation in Asia.

Therefore, we see the US dollar decline continuing through the first half of 2005.