US Dollar ($USD)

Currency speculation is not my forte, so take the following with as
much salt as you see fit.

First, I always look at the USD in terms of whether it is attractive
to hold domestically. Principal terms of reference are Fed Open
Market activity and whether there is a real rate of interest on
dollars left on deposit. I do not look at the "cookie jar" dollar
concept, as money is meant to be put to work, even if as savings
rather than spending. On balance, Fed Bank Credit has been grow-
ing modestly now for several years to correct for the long period
of excess monetary liquidity growth engineered by the Greenspan
Fed. With monetary liquidity creation now well controlled, I do not
see a threat to the dollar from this quarter. The 91-day T-bill yield
of only 1.3% compares unfavorably to an inflation of 4.0%, as does
the 2.9% yield on prime 90 day commercial paper. A dollar saved
in low risk assets is losing its purchasing power, and there is only
the need for liquidity as a rationale for keeping the dollar on tap in
the US. The situation is not going to change until the T-bill and the
inflation rate begin to come into better balance.

Not surprisingly, the USD has come down in value relative to other
senior currencies since 2000 reflecting a low interest rate regimen by
the US coupled with a moderate but persistent acceleration of
inflation. Now, there is increasing speculation that with a weaker UK
economy and prospective decelerating growth across the EU, the
relative attractiveness of the dollar might increase as offshore
interest rates moderate. This is a sensible thought, since the US has
led the other majors in growth weakness and rate cuts, and could lead
later this year and next with better growth and short rate increases.

I do not mind the low relative value of the USD, since it is now the only
check we have on still rampant Asian mercantilism, but I would not
argue with a mild upward push in value for a six month - one year
trade. I would like to see evidence of an improving "real" yield on
short term paper here before getting on a go long the dollar band-
wagon.