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Penrich Capital’s Favoured Currency Ideas Currencies to short CAD Currencies to buy JPY USD United States Dollar (Real Trade Weighted Index) 120 110 100 The US dollar has been one of our favoured long currencies for some time due to its low level. The broad trade-weighted basket compiled by the Federal Reserve show the USD to be close to the low point reached in the mid 1990s (see top chart). The USD’s decline during the past month has allowed us to increase our position size. Against the major currencies, the dollar is even lower than the broad trade-weighted basket suggests. Indeed, the USD is at the lowest point since the current system of floating currencies was introduced in the early 1970s. The USD is more than 20% below its long-term average against all major currencies except the JPY (see table). Developments in the external sector are important factor in our analysis that the USD could be approaching a cyclical low. US firms have gained competitiveness as the currency has fallen. During the past year, net exports have been becoming increasingly positive for US growth and the current account deficit has declined towards 5% of GDP (further information can be found on www.penrich.com). During recent months, a factor that has probably been placing some downwards pressure on the USD is the decline in interest rates compared to global interest rates. The Federal Reserve has been one of the only central banks that has been reducing official short-term interest rates. This has contributed to a decline in the spread between US bond yields and global bond yields (see bottom chart). If US domestic demand remains weak, it is possible that this spread will narrow further. This does not preclude a rise in the USD (the dollar was rising through 2000-2001 when the spread was narrowing) but does reduce the attractiveness of US fixed income assets. 90 80 Jan-90 Jan-95 Jan-00 Jan-05 USD; Now vs History Now Average Difference EUR 1.47 1.15 -27% YEN 113 117 -4% STG 2.11 1.63 -29% CHF 1.13 1.42 -26% SEK 6.30 7.69 -22% NOK 5.27 7.15 -36% CA D 0.93 1.36 -46% AUD 0.93 0.69 -34% NZ D 0.78 0.58 -35% (average refers to 1990-2005) US-Global 10 Year Bond Yields (%) 3.00 2.00 1.00 0.00 -1.00 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07