[FXJourney]

For USD, the outlook continues to be for a bit more depreciation in the near term,
and then appreciation through 2010 against most of G10. In general, market analysts do not expect to see a substantial pullback in risk appetite over the remainder of the year, and believe that the correlation between positive risk and a weaker USD will continue to hold at the same time.

[FXJourney]

On a long-term macro level, the flip side of further near-term USD weakness,
excessive non-USD G10 currency strength is likely to prove unsustainable. Indeed, we have generally characterized foreign currency strength as, to some extent, sowing the seeds of its own destruction, since these countries, which are generally more dependent on trade than the US, feel substantial pain from strength, such that economic conditions take a hit. This is most compelling in currencies such as JPY, where we see dependence on trade and exports as incompatible with continued strength. Moreover, every Dollar Bloc central bank has spoken about the negative impact that the recent strength of their local currencies is having on the growth front, which also links to the fact that their activity outlook is particularly dependent on trade. Most importantly of all, ECB President Trichet has now taken the first step of speaking out in support of a
strong USD.

[FXJourney]

Market view revolves around a breakdown in the correlation between risk and USD in 2010. Financial flows will ultimately favor the US, rewarding both growth and a robust investing environment. Some economists are calling for a 12-month S&P 500 target of 1200. While the US recovery is actually historically tame compared to the depth of the recession, it is forecast to be relatively robust across the majors, especially relative to the Euro Area and the UK. Consequently,
USD will benefit as financial market normalization continues through 2010.

longer-run fundamentals continue to provide a floor for USD. The US current account deficit has shrunk to a sustainable level and is no longer a knee-jerk reason to believe the USD should fall. With the Fed’s balance sheet expansion bottled up at the bank level in excess reserves, substantial excess capacity in labor and product markets, inflation expectations contained, and actual total and core inflation at very soft levels, analysts do not look for USD-debasing inflation as either a base case or a medium-term substantial market risk.