Currencies: The focus of currency trading has shifted to the Japanese Yen-Euro relationship. In the past week, the Yen, which had been extremely weak vs. the Euro, has staged a remarkable recovery against that currency. The US Dollar, while not directly involved in the Euro-Yen trade, has nevertheless benefited from the Euro's weakness.

With the Federal Reserve apparently reaching the end of its series of interest rate increases, traders had begun buying Euros and selling Japanese Yen in anticipation that the interest rate differential between the two regions would continue to widen. The European Central Bank has shown concern over increasing European inflation and is expected to continue to increase European interest rates, whereas the Bank of Japan is expected to go slow in raising Japanese interest rates. On August 31, the Euro climbed past 150 Yen per Euro, a new high for the European currency against the Yen.

Key European officials, however, are not pleased with the Euro's gains. A weaker Yen enables Japanese exports to make inroads in Europe at the expense of European manufacturers. On September 7, German Finance Minister Thomas Mirow said the Group of Seven (G-7) finance ministers and central bankers would discuss the weaker Yen when that group meets in Singapore next week. (Subsequently, Bank of Japan Governor Toshihiko Fukui said the G-7 would not focus on the Yen.)

In anticipation of some concerted effort by the G-7 to weaken the Yen, traders this week began taking profits on long Euro-short Yen positions. By Friday, September 8, the Euro had fallen below 148 Yen per Euro.

We believe the G-7 will not take any action against any currency and will instead revert to its usual statements regarding foreign exchange movements ("Let market forces determine the level of foreign exchange rates"). Therefore we look for the Euro to rebound against the Yen once next week's G-7 meeting concludes.

One factor which could provide underlying support to the Yen, however, is the possibility of an increase in the value of the Chinese Yuan. At a conference of Asian-Pacific finance ministers in Vietnam, Chinese Finance Minister Jin Renqing said China will increasingly allow the currency market to play a more important role in determining the Yuan's value, implying a move toward a floating currency. A stronger Yuan, theoretically, would boost demand for Japanese exports to China and, with it, increase demand for the Japanese Yen.

Meanwhile, the US Dollar has rebounded on renewed concerns about US inflation. The Fed left US interest rates unchanged when it last met on August 8. Economic data, available to the Fed at that time, seemed to point toward a weakening economy and reduced upward pressure on prices. Now, policy makers (and traders) are not so sure. The government increased its estimate of second quarter GDP growth to an annualized rate of 2.9 percent, up from a previously-reported 2.5 percent. In addition, the government said that labor costs jumped by 4.9 percent (annualized) in the quarter, more than the 4.0-percent rate forecast by economists. Now traders are not so sure the Fed is finished. Hence, the Dollar rebound.

Also helping the Dollar has been a precipitous drop in oil prices. Lower oil prices are positive for US economic growth. The price of crude oil, which topped 78 dollars a barrel in the beginning of August, was below 67 dollars on September 8, a fall of almost 15 percent. An unexpected build-up in gasoline and diesel inventories in the US was the principal factor in oil's price decline. US drivers represent the single largest constituent of world oil demand. Prices of unleaded gas futures have fallen more than 25 percent in the past month.

A final factor, which also pushed the Dollar higher, were comments from US Treasury Secretary Hank Paulsen at the aforementioned finance ministers meeting in Vietnam, in which he said he "supports a strong Dollar."

We nevertheless believe the Dollar's recovery over the past week was primarily due to technical factors and, therefore, could be short-lived. Further signs of economic weakness or easing inflation could send the Dollar lower again.

Precious Metals: Gold prices fell sharply this week, dropping almost five percent from highs achieved on September 5. Lower oil prices were a major factor in gold's decline. However, also contributing to the fall was a report from the World Gold Council that jewelers slashed their demand for gold during the first half of 2006.

Demand for gold has traditionally come from four sources: investor buying as a hedge against inflation, safe-haven buying in times of uncertainty, jeweler buying, and speculative buying chasing higher prices. Investors in recent years have turned to other interest-bearing instruments as an inflation hedge and have increasingly bought either Dollars or Swiss Francs as a safe haven. Jeweler buying is the one demand constant that is present in the gold market year-in and year-out. When that declines, speculative selling (by those speculators that chased the price higher) is usually not far behind.

Currencies: The US Dollar has come under pressure in the past several weeks as traders have speculated that the Federal Reserve has finished raising interest rates for the year. Benign inflation numbers and growing evidence of an economic slowdown have combined to send traders into other currencies.

Last week, the government reported that "core" producer prices -- less food and energy costs -- fell 0.3 percent in July (economists were predicting a 0.2-percent increase), while "core" consumer prices rose only 0.2 percent. Some traders were expecting a 0.3-percent increase. Worries about rising inflation had led speculators to buy Dollars in the belief that the Fed's failure to raise interest rates last weeks was only a temporary pause in what has been a two-year program by the Fed to raise interest rates, slow the economy, and keep inflation in check. Higher US interest rates are bullish for the Dollar. However, with inflation numbers lower then expected, the pressure on the Fed to raise interest rates is substantially decreased.

Other economic data released last week reinforced the argument for a slowing economy: July housing starts and building permits were both below expectations, while industrial production and capacity utilization were also less than expected.

Consumer confidence also appears to be flagging. The University of Michigan's consumer confidence index slipped to 78.7 for August, compared to economists' predictions of an 83.8-reading. Consumer spending normally accounts for two-thirds of total economic activity.

During the week beginning August 21, several key economic reports will either confirm or contradict current attitudes: existing and new home sales data will be released on Wednesday and Thursday, respectively, while the report on July durable goods orders is also due Thursday. All these reports are expected to show declines from previous months. Numbers in line with expectations could send the Dollar even lower.

Futures contracts in the Federal Funds Rate (the Fed's benchmark interest rate) are traded on the Chicago Board of Trade. Futures prices in those contracts are a good indicator of traders' estimates of future Fed Funds Rates. Current trading signals that traders believe there is only a fifty percent chance of the Fed raising interest rates again before the end of the year.

While the Fed puts a hold on future US interest rate increases, the European Central Bank is expected to continue increasing its own interest rates as the European economic expansion continues. Increases in foreign interest rates relative to US interest rates, narrowing the interest rate differentials between the two regions, would be further bearish for the Dollar.

Further hurting the Dollar are continued high oil prices. On Monday, Iran again refused to meet UN demands to halt uranium enrichment. Coupled with suspected Iranian support for Hezbollah, the Iranian attitude should maintain upward pressure on oil prices and, with that upward pressure, downward pressure on the Dollar.

Precious Metals: Gold has been in a trading range for the past month (between $610 and $660 an ounce), with gold's price generally moving in synch with oil prices. Gold should remain well-supported in the 610-620 area by concerns over Iran's nuclear program, unrest in Lebanon, the continuing war in Iraq, and the weaker Dollar.

Silver has moved sideways during the same period, trading in approximately a 1-2 Dollar range. Interest in silver has virtually dried up.

Currencies: The focus of currency trading has shifted to the Japanese Yen-Euro relationship. In the past week, the Yen, which had been extremely weak vs. the Euro, has staged a remarkable recovery against that currency. The US Dollar, while not directly involved in the Euro-Yen trade, has nevertheless benefited from the Euro's weakness.

With the Federal Reserve apparently reaching the end of its series of interest rate increases, traders had begun buying Euros and selling Japanese Yen in anticipation that the interest rate differential between the two regions would continue to widen. The European Central Bank has shown concern over increasing European inflation and is expected to continue to increase European interest rates, whereas the Bank of Japan is expected to go slow in raising Japanese interest rates. On August 31, the Euro climbed past 150 Yen per Euro, a new high for the European currency against the Yen.

Key European officials, however, are not pleased with the Euro's gains. A weaker Yen enables Japanese exports to make inroads in Europe at the expense of European manufacturers. On September 7, German Finance Minister Thomas Mirow said the Group of Seven (G-7) finance ministers and central bankers would discuss the weaker Yen when that group meets in Singapore next week. (Subsequently, Bank of Japan Governor Toshihiko Fukui said the G-7 would not focus on the Yen.)

In anticipation of some concerted effort by the G-7 to weaken the Yen, traders this week began taking profits on long Euro-short Yen positions. By Friday, September 8, the Euro had fallen below 148 Yen per Euro.

We believe the G-7 will not take any action against any currency and will instead revert to its usual statements regarding foreign exchange movements ("Let market forces determine the level of foreign exchange rates"). Therefore we look for the Euro to rebound against the Yen once next week's G-7 meeting concludes.

One factor which could provide underlying support to the Yen, however, is the possibility of an increase in the value of the Chinese Yuan. At a conference of Asian-Pacific finance ministers in Vietnam, Chinese Finance Minister Jin Renqing said China will increasingly allow the currency market to play a more important role in determining the Yuan's value, implying a move toward a floating currency. A stronger Yuan, theoretically, would boost demand for Japanese exports to China and, with it, increase demand for the Japanese Yen.

Meanwhile, the US Dollar has rebounded on renewed concerns about US inflation. The Fed left US interest rates unchanged when it last met on August 8. Economic data, available to the Fed at that time, seemed to point toward a weakening economy and reduced upward pressure on prices. Now, policy makers (and traders) are not so sure. The government increased its estimate of second quarter GDP growth to an annualized rate of 2.9 percent, up from a previously-reported 2.5 percent. In addition, the government said that labor costs jumped by 4.9 percent (annualized) in the quarter, more than the 4.0-percent rate forecast by economists. Now traders are not so sure the Fed is finished. Hence, the Dollar rebound.

Also helping the Dollar has been a precipitous drop in oil prices. Lower oil prices are positive for US economic growth. The price of crude oil, which topped 78 dollars a barrel in the beginning of August, was below 67 dollars on September 8, a fall of almost 15 percent. An unexpected build-up in gasoline and diesel inventories in the US was the principal factor in oil's price decline. US drivers represent the single largest constituent of world oil demand. Prices of unleaded gas futures have fallen more than 25 percent in the past month.

A final factor, which also pushed the Dollar higher, were comments from US Treasury Secretary Hank Paulsen at the aforementioned finance ministers meeting in Vietnam, in which he said he "supports a strong Dollar."

We nevertheless believe the Dollar's recovery over the past week was primarily due to technical factors and, therefore, could be short-lived. Further signs of economic weakness or easing inflation could send the Dollar lower again.

Precious Metals: Gold prices fell sharply this week, dropping almost five percent from highs achieved on September 5. Lower oil prices were a major factor in gold's decline. However, also contributing to the fall was a report from the World Gold Council that jewelers slashed their demand for gold during the first half of 2006.

Demand for gold has traditionally come from four sources: investor buying as a hedge against inflation, safe-haven buying in times of uncertainty, jeweler buying, and speculative buying chasing higher prices. Investors in recent years have turned to other interest-bearing instruments as an inflation hedge and have increasingly bought either Dollars or Swiss Francs as a safe haven. Jeweler buying is the one demand constant that is present in the gold market year-in and year-out. When that declines, speculative selling (by those speculators that chased the price higher) is usually not far behind.

Currencies: The Federal Reserve was the primary focus of currency traders in early August trading. The Fed's Open Market Committee was scheduled to hold its regularly-scheduled credit-policy meeting on Tuesday, August 8, with the possibility that the Fed might leave interest rates unchanged for the first time in more than two years.

Traders had been selling the Dollar over the previous two-week period in expectations the Fed would leave interest rates unchanged for the first time in eighteen FOMC meetings, dating back to June 2004. The Dollar was down two percent against both the Euro and the Japanese Yen during that time frame. Trading in fed fund futures, on the Chicago Board of Trade, indicated only an 18-percent probability the Fed would increase interest rates. Some analysts believe the Fed could actually cut rates before the end of 2006.

On Friday, August 4, the Labor Department reported that non-farm agricultural jobs only increased 113,000 in July, below the 145,000-job gain expected by economists, the third disappointing month in a row. The job numbers further reinforced the belief in a Fed pause.

Higher oil prices and declining house prices could lead to reduced consumer spending over the coming months. Consumer spending contributes to two-thirds of US GDP activity and consumer outlays were the only factor that enabled the US to weather the 2001-2002 economic slowdown. So a consumer-spending slowdown this time around could cause major problems.

European central banks, meanwhile, remain most concerned about inflation, and consumer inflation rates in the Eurozone, the UK and Switzerland all remain above two percent, generally considered the upper limit of the central banks' target ranges for inflation. Meanwhile, a rebounding Japanese economy should push the Japanese to again raise their own interest rates.

Narrowing interest rate differentials, with foreign interest rates gaining relative to US rates, favor selling Dollars. On August 3, both the Bank of England (unexpectedly) and the European Central Bank increased key lending rates, each by 25 basis points. The BOE raised its base lending rate to 4.75 percent while the ECB hiked its rate to 3.00 percent.

Besides lower US interest rates, also contributing to the underlying Dollar weakness was a rise in oil prices on August 7, to over 76 dollars a barrel. BP announced its was shutting its Alaskan Prudhoe Bay field after discovering a rupture in a pipe line that was supposedly due to corrosion. The Prudhoe Bay field accounts for 8 percent of US oil production, generating 400,000 barrels a day. Both OPEC and the Bush administration said they would attempt to cover the shortfall. Bush said the nation's Strategic Oil Reserve would be opened up to requests for emergency supplies. However, analysts felt that neither source could make up for the BP loss.

Continuing violence in the Middle East has not helped the Dollar, which, in the past has benefited from safe-haven buying. As of this writing, the conflict drags on even despite the passage of a UN resolution that, its authors hoped, would lead to a halt in the violence.

Precious Metals: Gold prices have risen in response to the fighting in the Middle East, as one might expect. Gold has risen fifty dollars in the past two weeks, from a low of $602 an ounce on July 24, to $652 on August 7, a gain of about eight percent. Safe-haven buying was generally responsible for the latest increase.

However, traders have to be disappointed by gold's price movement over the past two weeks, especially when compared to price movements in early 2006 (a gain of 180 Dollars, or 33 percent, from January through mid-May) and the rally following the mid-May sell-off (120 Dollars, or 22 percent).

Given the extent of the fighting between Israel and Hezbollah, gold prices should have been expected to at least test mid-July highs, with a chance at reaching $700 an ounce. Instead, the latest rally appears to be petering out at $650.

Should the fighting come to an end in the next week or so, we could see gold prices slip back toward $600.

Silver prices, because of the relatively less liquidity present in the silver markets, have outperformed gold prices over the past two weeks, posting an eighteen percent gain. Nevertheless, should gold prices fall, so should silver.

Stock Markets: The prospects of a pause in US interest rate increases drove US stock prices higher over the past fortnight. The S&P-500 Index rose about 3 ½ percent during the period. The Bombay Sensex Index, on the other hand, gained about 9 percent during the same period.

US GDP grew at an annual rate of only 2.5 percent in the second quarter, after 5.6-percent, annualized, growth in the preceding quarter. The economy is expected to only grow at a 3.5-percent rate for the second half of the year. Such a slowdown in growth would normally be a concern to stock traders. However, easing interest rates could bolster a sagging housing market, which had been a main prop of the overall US economy, and could also aid business investment spending.

Indian stock prices fell almost a third, between mid-May and mid-June. Since its mid-July low, the Sensex has regained about 60 percent of its losses. Traders have been relieved by the ability of prices to hold at those July lows. Now, however, the latest rally seems to be stalling, with substantial resistance (in the Sensex) at 11,000.

We continue to believe traders should only trade emerging markets as part of a diversified portfolio. Such a philosophy greatly reduces the risk of loss from a sharp drop in any one particular market.

Currencies: Fighting in the Middle East dominated currency trading in the past week. Two Israeli soldiers were captured by Hezbollah guerillas in a clash near the Lebanese border. Israel retaliated by attacking Lebanon, bombing parts of Beirut, including Beirut International Airport. Hezbollah then fired rockets into northern Israel, hitting major cities such as Haifa and Nazareth. A number of civilians were killed on both sides of the border.

Currency traders reacted to the fighting by initially buying US Dollars as a safe-haven investment. As the week came to a close, however, it appeared that Israel easily had the upper hand in the battle. It also became apparent that the conflict was not going to spread from Lebanon. Many experts were predicting that the fighting would be over in a matter of a few weeks, or even, possibly, a few days. Consequently, traders reverted to economic fundamentals and the Dollar began to sell off.

Prior to the fighting in the Middle East, any relative strength held by the Dollar had come from favorable interest rate differentials: the US Federal Reserve has continually raised interest rates over the past two years, in the face of strong US economic performance, while other central banks had been hesitant to raise their own rates. With the US rates above those of other developed nations, traders shifted their capital to the Dollar.

This year, however, we have seen the other developed economies begin to improve while the US economy has started to show some signs of slowing. European economies will probably grow at an average of 2.5 percent to 3 percent (annualized) for the remainder of the year, while growth in Japan has exceeded three percent in each of the past two quarters. Consequently, foreign central banks have recently been raising their interest rates while the Fed may be nearing an end to its own increases. As interest rate differentials begin to narrow, the Dollar could lose steam.

The Dollar's course, for the rest of 2006, will certainly depend on US economic performance. In 2001-2002, when the economy last stumbled and business spending dried up, US consumers managed to keep the economy afloat (consumer spending accounts for two-thirds of total US GDP growth). Consumer spending, in general, was propelled by increased consumer debt, with borrowing against both home equity and credit cards making up most of the debt.

This time, the consumer may not be able to support the economy. Higher energy prices, especially gasoline prices, have cut into consumers' budgets, while house prices seem to have topped out, reducing home equity. Higher interest rates could also curtail household borrowing. Higher wages and additional jobs might offset these factors to some degree but, on balance, consumer spending should grow at a slower rate than in the 2001-2002 period. Meanwhile, business investment should grow during the remainder of 2006, but we do not believe it will be enough to offset the slowdown in consumer spending.

Federal Reserve Chairman Ben Bernanke testified before Congress on Wednesday and Thursday and his comments were encouraging to Dollar bears. While Bernanke remains concerned about inflation, he also indicated that he thought the economy was showing signs of a slowdown. Thus, traders now believe the Fed will not raise interest rates again when the Fed next meets in August.

Thus, had the Middle East remained quiet, we probably would have seen the Dollar again start to weaken. We feel that the Dollar, at current levels, could be near its highs of the year.

One factor, which has concerned economists in the past, but which, we believe, should not be a concern, is the US current account deficit. We believe that growth in the deficit should slow as foreign economies begin to improve and US exports to those countries expand. In addition, foreign investors should continue to be willing to finance the deficit. May was a case in point: net foreign purchases of US securities totaled $69.6 billion in May, more than the $63 billion supposedly needed to finance the deficit, well above the $58.4-billion level expected by economists, and substantially above the $51.1 billion worth of net security purchases in April.

Precious Metals: Gold initially followed the Dollar higher, on news of the Middle East fighting, reaching a high of 676 dollars on Monday, July 17. But, by the end of the week, gold had fallen back to 634 dollars, a decline of almost seven percent from Monday's high. Silver prices never reacted to the Middle East news, trading in only a one-dollar range throughout the week, and closing at 11.17.

Traditionally, over the years, gold has been the pre-eminent safe-haven investment. But over the past several decades, gold's role in that regard has been usurped by the Dollar.

This year, gold prices have staged an impressive move up, at one point increasing more than 75 percent in reaching a high of 730 dollars an ounce (in May). As gold rallied, the "gold bugs" have come out of the woodwork (as they seem to do on any price rally). "Now was the time to re-insert gold into one's portfolio."

After reaching 730, prices suffered a correction falling all the way back to 542 in June. As prices recovered from that low, however, the gold bulls the correction as simply another buying opportunity.

But, we feel gold's failure to follow through from Monday's highs underlines gold's underlying weakness as a long-term investment. We would prefer to place our funds in financial investments.

Stock Markets: World stock markets have also moved in trading ranges over the past few weeks. Most markets sold off initially on the Middle East news but, like the currencies, reverted to fundamentals as the week wore on. Most world markets took their lead from the US markets.

US stocks drew their strength from the hope that the Federal Reserve could be finished raising interest rates. Bernanke's comments Wednesday and Thursday kindled that hope. But over the past few months Bernake has frequently waivered and so have the markets. Now the markets will rise and fall on the economic news.

Currencies: The US Dollar has continued to gain against the other major currencies over the past two weeks. Expectations that the Federal Reserve will raise interest rates again when the Fed's Open Market Committee meets again June 28-29 have been the major factors pushing the Dollar higher.

Despite evidence that the US economy could be showing signs of slowing (especially relative to economies in the other industrial nations), Federal Reserve Chairman Ben Bernanke continues to maintain that inflation is still the major threat to US economic growth. His comments have been repeatedly reinforced by other Fed officials in various speeches made in the past two weeks.

Consequently, positive interest rate differentials, in favor of the US Dollar, are sending the Dollar higher. Interest rate differentials, between US Treasury 10-year notes and comparable German bonds, for example, have widened to 1.91 percent, their greatest difference in eight months.

But the Dollar's support from favorable interest rate differentials could change soon. In Europe, recent reports show a disturbing resurgence in inflation. German producer prices probably rose 6.4 percent, year-on-year, in May. Meanwhile, consumer prices in the Eurozone were up 2.5 percent from year-earlier levels. The European Central Bank's target for inflation is generally considered to be two percent. The ECB raised its benchmark lending rate to 2.75 percent on June 8 and is expected to continue raising that rate another half-percent by the end of 2006.

Industrial production in Switzerland was up 9.2 percent in the first quarter, compared to the first quarter 2005, its biggest gain in six years, raising prospects of interest rate increases by the Swiss National Bank.

In the UK, house prices rose for the sixth straight month, consumer prices rose at their fastest rate in seven months, and average earnings rose at their fastest pace since April, 2005. The Bank of England has left its benchmark interest rate unchanged since last year, but that too could change in the near future.

Finally, Japan recently abandoned its anti-deflationary monetary policy but has so far been reluctant to raise interest rates in the face of an expanding economy.

So we have the prospect of higher interest rates in all the other major industrialized economies, while the interest rate hike expected in the US on June 29 could be the Fed's last. Following June 29, we could see interest rate differentials begin to narrow and with that narrowing the Dollar could be poised for another decline.

On top of narrowing interest rate differentials, the magnitude of the US current account deficit also continues to weigh on the Dollar. The US current account deficit narrowed to 208 billion dollars in the first quarter, from 222 billion, and the deficit will probably continue to decline as overseas economies begin to outperform the US economy. However, given the magnitude of the deficit, the US has a long way to go before this deficit disappears. Meanwhile the US needs to attract foreign capital (about 65 billion dollars a month) to finance that deficit. Net foreign purchase of US securities fell to 46 billion dollars in April. Unless that level of purchases rebounds, the current account deficit will be another worry for Dollar bulls.

Precious Metals: The price of gold fell to $542 an ounce on June 14, a 25-percent decline from the high of $730 reached just once month earlier. Prices rebounded modestly in the two trading days following that nadir, but fell another 13 dollars on June 19.

Silver has followed gold down, but in more spectacular fashion: falling from $15.21 an ounce in mid-May to $9.48 on June 14 – a plunge of 38 percent!

Theory has it that precious metals prices should be rising given the conditions present in today's markets. Inflation is worrisome and gold and silver have always been harbingers of rising inflation. And prices should also rise in times of international tension. On June 19, North Korea threatened to test a long-range ballistic missile capable of reaching the west coast of the United States. Instead, gold prices fell 13 dollars (two percent) and silver dropped 26 cents (also two percent).

We believe the recent action in the precious metals underscores our theory that most of the recent run-up in the prices of both metals has been speculative in nature, unsupported by fundamentals. Speculators pushed the prices to unrealistic levels, and what goes up in such fashion usually comes down more spectacularly. We believe both metals have more to go on the downside./p>

Stock Markets: The Bombay Sensitive Index (Sensex) rebounded more than eleven percent from June 15-19, reversing a portion of the losses it suffered in the past month.

We believe the action in the Sensex is reminiscent of the movement in precious metals prices. The emerging markets are not liquid markets. When US stock markets began to decline, emerging markets indexes fell even faster. Then, on June 14-15, the US markets staged a spectacular recovery and the Indian market followed. But, because of its relative illiquidity, its bounce was even more striking.

We have pointed out several times that investors cannot simply chase returns, that they must consider risk as well. We believe it is okay to put a portion of one's portfolio in emerging markets, but the best way to manage risk is to diversify one's holdings.

Currencies: The US Dollar has continued to gain against the other major currencies over the past two weeks. Expectations that the Federal Reserve will raise interest rates again when the Fed's Open Market Committee meets again June 28-29 have been the major factors pushing the Dollar higher.

Despite evidence that the US economy could be showing signs of slowing (especially relative to economies in the other industrial nations), Federal Reserve Chairman Ben Bernanke continues to maintain that inflation is still the major threat to US economic growth. His comments have been repeatedly reinforced by other Fed officials in various speeches made in the past two weeks.

Consequently, positive interest rate differentials, in favor of the US Dollar, are sending the Dollar higher. Interest rate differentials, between US Treasury 10-year notes and comparable German bonds, for example, have widened to 1.91 percent, their greatest difference in eight months.

But the Dollar's support from favorable interest rate differentials could change soon. In Europe, recent reports show a disturbing resurgence in inflation. German producer prices probably rose 6.4 percent, year-on-year, in May. Meanwhile, consumer prices in the Eurozone were up 2.5 percent from year-earlier levels. The European Central Bank's target for inflation is generally considered to be two percent. The ECB raised its benchmark lending rate to 2.75 percent on June 8 and is expected to continue raising that rate another half-percent by the end of 2006.

Industrial production in Switzerland was up 9.2 percent in the first quarter, compared to the first quarter 2005, its biggest gain in six years, raising prospects of interest rate increases by the Swiss National Bank.

In the UK, house prices rose for the sixth straight month, consumer prices rose at their fastest rate in seven months, and average earnings rose at their fastest pace since April, 2005. The Bank of England has left its benchmark interest rate unchanged since last year, but that too could change in the near future.

Finally, Japan recently abandoned its anti-deflationary monetary policy but has so far been reluctant to raise interest rates in the face of an expanding economy.

So we have the prospect of higher interest rates in all the other major industrialized economies, while the interest rate hike expected in the US on June 29 could be the Fed's last. Following June 29, we could see interest rate differentials begin to narrow and with that narrowing the Dollar could be poised for another decline.

On top of narrowing interest rate differentials, the magnitude of the US current account deficit also continues to weigh on the Dollar. The US current account deficit narrowed to 208 billion dollars in the first quarter, from 222 billion, and the deficit will probably continue to decline as overseas economies begin to outperform the US economy. However, given the magnitude of the deficit, the US has a long way to go before this deficit disappears. Meanwhile the US needs to attract foreign capital (about 65 billion dollars a month) to finance that deficit. Net foreign purchase of US securities fell to 46 billion dollars in April. Unless that level of purchases rebounds, the current account deficit will be another worry for Dollar bulls.

Precious Metals: The price of gold fell to $542 an ounce on June 14, a 25-percent decline from the high of $730 reached just once month earlier. Prices rebounded modestly in the two trading days following that nadir, but fell another 13 dollars on June 19.

Silver has followed gold down, but in more spectacular fashion: falling from $15.21 an ounce in mid-May to $9.48 on June 14 – a plunge of 38 percent!

Theory has it that precious metals prices should be rising given the conditions present in today's markets. Inflation is worrisome and gold and silver have always been harbingers of rising inflation. And prices should also rise in times of international tension. On June 19, North Korea threatened to test a long-range ballistic missile capable of reaching the west coast of the United States. Instead, gold prices fell 13 dollars (two percent) and silver dropped 26 cents (also two percent).

We believe the recent action in the precious metals underscores our theory that most of the recent run-up in the prices of both metals has been speculative in nature, unsupported by fundamentals. Speculators pushed the prices to unrealistic levels, and what goes up in such fashion usually comes down more spectacularly. We believe both metals have more to go on the downside.

Stock Markets: The Bombay Sensitive Index (Sensex) rebounded more than eleven percent from June 15-19, reversing a portion of the losses it suffered in the past month.

We believe the action in the Sensex is reminiscent of the movement in precious metals prices. The emerging markets are not liquid markets. When US stock markets began to decline, emerging markets indexes fell even faster. Then, on June 14-15, the US markets staged a spectacular recovery and the Indian market followed. But, because of its relative illiquidity, its bounce was even more striking.

We have pointed out several times that investors cannot simply chase returns, that they must consider risk as well. We believe it is okay to put a portion of one's portfolio in emerging markets, but the best way to manage risk is to diversify one's holdings.

Currencies: The US Dollar has generally moved sideways against other major currencies over the past two weeks. Drifting interest rate expectations have left traders uncertain regarding the US currency's next move.

For much of this year, the Dollar has been under selling pressure based on the belief that the US Federal Reserve (or "Fed") was nearing the end of its program of raising interest rates. The Fed has been raising rates in an attempt to slow the growth of inflation in the face of an expanding US economy.

Starting in June 2004, the Fed raised its target for the Federal Funds rate sixteen times from one percent in 2004, to its current level of five percent. (The Federal Funds rate, or "Fed Funds" rate, is the rate charged by one bank to another when lending short-term funds to that bank. As such, it is the key interest rate in US money markets.) At every Federal Reserve Open Market Committee meeting (the meeting at which the Fed sets credit policy) held since June 2004, the Fed has raised this target one-quarter percent.

The Fed's next Open Market Committee meeting will take place June 28-29. Over the past month or so, the Fed has been receiving mixed signals on US economic performance. The economy has shown some signs of slowing – last Friday, the monthly US employment report showed the economy creating significantly fewer jobs in May than expected – but recent inflation numbers have also been worrisome. High energy prices have contributed to inflation worries. Nevertheless, many traders believed the Fed would pause at its next meeting – leaving interest rates unchanged -- while waiting for better directional signals.

While it appeared that the Federal Reserve was about to call a halt to future rate increases, interest rates overseas seemed ready to rise. European economic performance was finally improving, leading economists to predict the European Central Bank would become more aggressive in increasing rates (some economists were predicting the ECB would increase its own base lending rate a half-percent when its own credit committee meets on June 8).

Meanwhile the Bank of Japan abandoned its anti-deflationary credit policy (Japan has been beset by deflation for a number of years) and also appeared ready to begin raising rates.

The projected narrowing of interest rate differentials –foreign rates rising relative to their US counterparts – would be bearish for the Dollar and bullish for currencies such as the Euro, Japanese Yen and British Pound.

On Monday, June 5, new Federal Reserve Chairman Ben Bernanke (he replaced longtime Fed chief Alan Greenspan on January 31) upset traders' apple carts, however, with some extremely hawkish remarks regarding inflation.

Bernanke said recent increases in inflation measures were "unwelcome." He said the Fed would be "vigilant in keeping inflation in check." He said inflation remained the biggest risk for the economy. On Tuesday, June 6, St. Louis Federal Reserve president William Poole seemed to underline Bernanke's comments. He said that the Federal Reserve should maintain an "upside bias" on interest rates – a cooling economy may not slow inflation.

Now, most traders and economists believe the Federal Reserve will raise interest rates yet again on June 29, and, in so doing, continue to underpin the US Dollar.

Precious Metals: Gold and silver prices continued to decline over the past two weeks. Gold fell to a low of $625 an ounce on June 6, down over 14 percent from its May 12 high ($730.25) and down 5 percent over the past two weeks. Silver reached a low of $11.77 on June 6 – off 22 percent from its high of $15.21 touched on May 11 and 6 percent lower in the last two weeks.

Gold and silver prices are supposed to be inflation barometers. We've just talked about the Fed Chairman Bernanke's concerns about inflation. Why weren't his comments bullish for precious metal prices? What gives?

The price of gold rose from a low of 493 dollars in mid-December to its mid-May high of 730 dollars mainly on concerns about the health of the US Dollar. At least, that was the fundamental reason for the rise in price. But the world is full of so-called "gold bugs," traders and investors who believe the yellow metal remains the ultimate investment. As the price began to rise these "bugs" came out of the woodwork to jump on the gold bandwagon. As a result, a considerable speculative premium was built into gold's price. A level of 730 dollars was significantly higher than the "fundamental' value of the metal. Silver prices followed gold's price higher.

In any market that has such a speculative premium built into it, what goes up quickly (as both gold and silver did) often comes down faster. We believe this is what is happening to both gold and silver today. We believe the bull market for both metals is over (or, maybe, as some precious metals "bulls" believe, the current correction to the recent rise in precious metals prices has further to run on the downside).

Global Stock Markets: Stock markets around the world have also suffered from the effects of Bernanke's hawkishness. The US S&P 500 Index (at 1256) is down 5 percent from the high it reached in early May (1326). But stock markets in emerging markets, such as India, have come down much faster. Indian stock markets, for example, are down 33 percent from mid-May highs and off 16 percent in the past two weeks alone!

We believe that traders had turned to markets in emerging countries in a blatant quest for the highest return, without considering the risk inherent in those markets. There is a fundamental relationship in investing: returns on investment are matched by commensurate levels of risk -- the higher the return the greater the risk associated with that return. Unfortunately, markets that generate extraordinary returns – as the Indian markets did – often also come down faster then they go up, as the Indian markets have done.

We believe that investors should be prudent. There are no risk-free investments (with the exception of US Treasury securities). The best way to manage risk is to diversify one's investments.

The Mumbai Stock Exchange Sensitive Index, or SENSEX, fell 460.95, on Thursday, June 8, to 9295.81, its lowest level since January 18. Thursday's decline, a drop of 4.7 percent, capped an 11-percent fall over the past four trading sessions.

Stocks all over Asia suffered their largest losses in two years Thursday, as investors expressed concerns over rising interest rates by selling shares, but the decline in Bombay stocks was the region's largest.

Reliance Industries Ltd., India's largest private oil refiner, saw its shares fall 7.5 percent, to 825.25, while shares of ICICI Bank Ltd., India's second biggest lender, dropped 6 percent, to 499.80. The two companies, together, constitute 20 percent of the SENSEX weighting.

Expectations of rising interest rates worldwide have sent investors everywhere running for the exits. On Monday, US Federal Reserve Chairman Ben Bernanke spooked the markets when he suggested the US central bank was not done raising US interest rates. Traders had believed the Federal Reserve would take a breather and leave interest rates unchanged (after sixteen consecutive increases) when the Fed meets next on June 28-29.

Then Thursday the European Central Bank raised its benchmark interest rate a quarter percent. But the straw that broke the back of the Indian markets was an unexpected increase in its own benchmark interest rate by the Bank of India, to 5.75 percent.

Financial companies, such as ICICI, are most vulnerable in a climate of rising interest rates, because higher rates have a direct impact on corporate profits.

Over the past year, and certainly since the beginning of 2006, investors worldwide have taken advantage of excess liquidity to seek those investments that provided the greatest returns. Shares in emerging markets often met investors' criteria in this regard. Emerging markets, because of their international interest, easily outperformed markets in the larger industrial nations. And the Indian markets have been among the top performers among the emerging markets.

Unfortunately, too often investors have chased returns without considering the risk associated with those returns. They have also used leverage – borrowing a portion of their investment capital – more than they probably should have.

The combination of inadequate attention to risk and excess leverage can often lead to steep declines. And that seems to be another culprit here.

Higher interest rates make it harder for investors to carry leveraged investments. And once a market with substantial speculative premium begins to decline, it can fall faster than it's gone up.

We believe the Indian markets can face even further declines.

Commodity futures markets are generally recognized as effective means for producers and users of various commodities to manage the risk of price fluctuation associated with those commodities. The markets perform an extremely important economic function: the transfer of risk. By buying or selling contracts forward, producers and users of commodities can reduce their price risk. This risk-avoidance is known as "hedging" and the participants are called "hedgers." Other market participants, looking for above-average returns, are willing to take on this risk. They are known as "speculators." Risk is transferred, by the markets, from hedgers to speculators.

Commodity futures markets have proliferated all over the world. In India, for example, there are currently operating twenty-four recognized commodity exchanges and associations. Therefore, we feel it would be interesting to review the history of the development of these markets.

Supposedly, there was a rice market operating in Japan as far back as the sixteenth century. And other countries can also probably point to ancient commodity markets. But the modern commodity futures market, as it exists today, is most-widely recognized as dating from the establishment of the Chicago Board of Trade in 1848.

Since Chicago's inception, primarily because of its status as a railroad hub, the city has always been the center of the US grain trade. In the early 1800's, grain buyers and sellers would always meet in Chicago. Because grain was harvested at only one time in the year, there would be a supply gut in the fall, and prices would be extremely low. Grain shortages and resultant high prices would exist the rest of the year. Price movements thus exhibited a pattern of extreme peaks and valleys.

To solve this problem, several businessmen formed the Chicago Board of Trade. Farmers could sell their grain forward, through a futures contract, at any time during the year – when they felt prices were more to their liking – and users could also buy a contract at any time.

The Board of Trade became the premier marketplace for storable agricultural commodities: wheat, corn, soybeans, oats. A second exchange – the Chicago Butter and Egg exchange – was started in 1898. This exchange changed its name to the Chicago Mercantile Exchange in 1919 and specialized in perishable commodities: butter, eggs, pork bellies, live cattle, live hogs.

Later, exchanges began in New York and other international financial centers for trading various international commodities: sugar, coffee, cocoa, gold, silver, crude oil, etc.

In 1972, as the world monetary system was going off the system of fixed exchange rates, a Chicago exchange official named Leo Melamed, working with Milton Friedman at the University of Chicago, developed a contract in foreign currency futures, which began trading at the Chicago Mercantile Exchange. These became hugely successful and were the first futures markets in financial instruments.

Subsequently, futures markets were developed for debt instruments – such as Treasury Bills, Treasury Bonds and Eurodollar deposits – and later for stock indexes, such as the S&P 500.

The Eurodollar Deposit Futures Contract has become the world's largest financial contract, with futures and options on futures trading over 1.4 million contracts each day. Open interest – the number of contracts open – currently totals 39 million! Since each contract represents one million dollars worth of obligations, the total open interest in Eurodollar futures and options represents 39 trillion dollars in debt obligations.

Commodity markets in India date back to 1875, when the Bombay Cotton Trade Association Ltd. was founded. In 1900, the Gujarati Vyapari Mandali was formed to trade futures in oilseeds, and in 1919, contracts in raw jute and jute goods began trading in Calcutta. A futures markets in bullion was started at Mumbai in 1920.

In 1952, the Forward Contracts (Regulation) Act was enacted to regulate Indian futures markets trading. The Act also established the Forward Markets Commission.

Today, three national, multi-commodity exchanges account for approximately 95 percent of all contracts traded. Trading is done electronically. The National Multi Commodity Exchange of India Limited in Ahmedabad was formed in 2002 and trades over 60 commodities. The Multi Commodity Exchange of India Limited. in Mumbai, trades over 50 commodities.

Commodity futures exchanges play an important role in a nation's economy. In addition, they offer the advantage for protection of market participants since virtually all are government-regulated.