The fund had an excellent quarter in rand terms, boosted strongly by the depreciation of the rand versus the US dollar (6.4%). For the first time in 3 years, the annual return was also positive in rand terms.

Interest rates in the US have now been raised by 9 times in the past year (0.25% each time) and finally yields are beginning to look more palatable, with retail money market yields at 2.2% (almost treble the European retail money market yield of 0.8%) and institutional yields of over 3%. STANLIB expects the US Federal Reserve to continue raising short-term rates from the current 3.25% to 4%, at which stage the Fed may stop.

The really big event during the quarter was the big move in the dollar relative to the euro and pound…and almost all other currencies too. For the first time in over 3 years, the dollar appeared to break its big downtrend, which had seen the dollar fall against the euro from 0.84 US cents to the euro to $1.36 to the euro (62%). Once the dollar broke back down through the $1.28 level in April, the trend appeared to be broken and the dollar quickly rallied to $1.185 to the euro (a gain of some 13% for the world's biggest currency against the 2nd biggest currency in just 5 months…and against the expectations of most forecasters). The currency has since retraced a little of this gain to 1.21. Part of the reason behind the gain was the fact that the dollar now pays much more interest than the euro.

It is possible that the dollar could retrace a bit more of its big gain so far in 2005, but for now the big news remains the fact that the down-trend has been broken. It is the dollar that is calling the shots against the rand. The STANLIB house view is for a dollar/euro exchange rate of $1.23 at end 2005, slightly weaker than the current level.

Finally the fund delivered a good positive rand return during the quarter, almost double the return of the JSE All Share Index. This is largely because the first quarter of 2005 witnessed a strong US Dollar rally as the dollar gained against almost all global currencies, including the rand (10%). This was partly on the back of the seven hikes in the official interest rate in the US (from 1% last June to 2.75% currently). These hikes have raised the yield in a retail US dollar currency fund from 0% last June to 1.5% currently (and climbing), now higher than a euro currency fund's yield (0.9%). US Federal Reserve Bank Governor, Greenspan, now in his 18th year as arguably the most powerful financial man on the globe (at age 79), cautioned listeners about the short-term threat posed by inflation recently, as higher and higher oil and other commodity prices begin to bite. This added fuel to the dollar's rally as it gave a hint of further interest rate hikes in the US, perhaps even allowing for a 0.5% hike in the near future instead of the customary 0.25% hikes administered thus far. The US economy is also stronger than any of the other major developed countries. So the dollar's future movement relative to the other big currencies becomes a battle between these positives for the currency (stronger economic growth and rising interest rates) and the negatives of the massive excess of US imports over exports, coupled with the huge government deficit. A level of $1.28 to the euro is regarded by some top chartists as the key level. Should the dollar break below that level - and hold there for a few weeks at least - then the dollar's down-trend of the past 3 years-plus could be considered to be over…and a new uptrend would be in place. Although most of the cash in the fund is invested in institutional US dollar money markets offshore (through Fidelity Investments, the largest independent fund manager in the world), which typically earn 0.7 to 1% more than retail funds do, the annual management fee of the fund of 1.14%(including vat) does negate this yield advantage. The positive way to view this is that the annual management fee of the fund is largely funded by the extra yield obtained from investing in the higher yielding currency funds.

Alas, this fund is hurting big time because it has for the past one, two and three years been invested in one of the weakest currencies in the world, the US dollar. There is no other way to put it. For sure, it will have its day again; just when, we're uncertain of.

The rand rose by another 14.9% against the dollar in the quarter to end December 2004, so the negative return of the fund for the quarter of 12% was actually better than expected!

During the year the rand rose by 17.5% against the dollar, with the fund outperforming with a 15% negative return! One small benefit that will no doubt gradually benefit the dollar is the fact that official short-term interest rates in the US have more than doubled over the past year, albeit from an incredibly low base (from 1% to 2.25%) and apparently this trend is to continue.

Hence US dollar money markets offshore (retail) have seen their yields rise from 0.1% to almost 1.1% and they're still rising bit by bit. On the contrary, euro yields have remained at 0.9% all year (no hikes) and British yields, after rising 5 times, have remained flat for over 6 months at around 3.7%.