To understand why we should be concerned about the plunging value of the US dollar on the international currency markets, it is first necessary to appreciate why it is happening. A significant factor behind the decline is a recent hint from China that it may begin to diversify some of its foreign currency holdings out of dollars. The merest suggestion of a change in policy from Beijing has helped send the mighty American dollar reeling. What this shows us is how finely balanced - and potentially volatile - the world's economy is at the moment.
Of course, a weaker dollar is good news for any tourists visiting the US. Britons crossing the Atlantic for some Christmas shopping will find some goods, in effect, half price. But the potential wider consequences of its fall could be a considerably less attractive for all of us.
At the heart of the problem is the fact that Asian countries - China in particular - have a long-standing policy of holding vast foreign currency reserves in dollars to keep their own exchange rates down and boost their exports. This hoarding has financed the huge balance of payments deficit the US has accumulated in the past six years. The International Monetary Fund fears this imbalance has the potential to derail the entire world economy.
In one sense, the falling value of the dollar is a natural corrective to the US balance of trade imbalance. International finance markets are taking matters into their own hands by forcing the dollar's value down. A slightly weaker dollar is not in itself a bad thing, given that it is obviously overvalued.
The real danger is a disorderly fall. A rapid hike in the price of imported goods in the US could lead to domestic inflation and recession. Foreign companies derive an increasing proportion of their sales and profits from the US market. They would be hit by falling demand for their exports. So dominant is the US economy and so globalised have our economic relations grown that a recession in America would rapidly spread around the world.
Some will argue that none of this is anything new. A similar currency imbalance resulted from the massive Japanese economic expansion of the 1980s. Two decades ago, the US and Japan managed to get their central banks to work in concert and succeeded in managing an orderly descent in the value of the dollar. It is a moot point whether a similar deal will be possible this time.
Yet this hints at a solution. The global economy grows ever more sophisticated each year, but lacks any real international co-ordination of currency policy. This must be put right. The present potential for volatility is in none of our real interests - not even transatlantic bargain hunters.Reuse content