THE current weakness in the US dollar has caught a number of currency investors off-guard. Only six weeks ago many forex commentators had been hoping that the US dollar was, along with the Japanese yen, a one way bet. However, it has not worked out that way, prompting at least one economist, Mr David Morrison of Goldman Sachs, to ask whether this is purgatory or limbo for the dollar. ''The US dollar's relatively sharp fall against the European currencies over the past couple of weeks requires a close look as to why it has occurred and whether or not it signals the start of a major declining trend or whether it is only a temporary setback,'' he said. Mr Morrison, reported in this column along with the two other commentators at Barclays de Zoete Wedd and Merrill Lynch, are sceptical about the potential for recent rises in European currencies to remain in place for long. At Merrill Lynch in New York, Mr William Sterling is forecasting a deutschemark rate of 1.85 to the dollar and a sterling rate of 1.35 by the end of the year. Mr Chris Turner, an analyst with BZW in London, is looking for the same kind of gain for the US dollar to the mark and 1.40 in the sterling rate. ''Sterling is certainly at the top of its upside around now,'' he said. Technically, however, there could be a further upside above 1.56, as the next stopping point after this level is broken is 1.64. Mr Turner is looking for 135 in the yen rate over the same time period. Mr Morrison suggests: ''Purgatory seems more likely than limbo as far as the dollar is concerned, and we are inclined to retain our six-month to 12-month forecast range of 1.69-1.76. A softening in the US recovery and firmer than expected Bundesbank rates have tripped up the dollar on its road to supremacy. But the trend has not broken. There are some pretty terrible background negatives for European currencies which make any problems associated with the apparent slowdown in US recovery look like a tea party. Mr Morrison firmly believes the Bundesbank is going to have to cut domestic rates further as the economy there, under the continued stresses and strains of the unification process, piles into recession. Furthermore, the US appears to be on a sustained recovery path while the European economies are on recessionary paths. Germany's continuing fiscal difficulties are going to probably be on a par with the difficulties the US authorities have been grappling with since the late 1980s. On a valuation basis the European currencies look overvalued against the dollar. Meanwhile, the potential for the countries in the European Community to do anything effective about their plight is looking less likely because of the developing shambles among EC bureaucracies. Mr Turner also believes in the US recovery which is investment-led on the back of low inflation - providing for a long-term sustainable period of growth. The key to a change in the current set of circumstances over the next few months will be what happens in Europe. Mr Sterling points out: ''We expect sharp drops in European interest rates to be the dominant force in foreign exchange markets over the next six to 12 months, leading to further weakness of the European currencies against both the dollar and the yen.'' He believes there is upside potential in the Australian dollar's fortunes. Low inflation under two per cent and better than expected figures for government debt, amounting to a current account deficit of $797 million, have buoyed the Australian dollar's prospects in the eyes of currencies investors. Mr Sterling is expecting an Australian dollar rate of 75 US cents. Those looking to take their hard-earned Hongkong dollars and put them into European currencies had better wait, if they can, until much later in the year to allow the expected plague of bad economic news in Europe come home to roost. Those bringing money the other way had better be prepared to undertake their transactions in the short to medium term as the forecast bounce in the US dollar could come over a matter of days.