The recent decline of the dollar is not a by-product of traditional concerns about the US current account deficit. The US economy is in the midst of an export boom that could reduce the deficit from more than 6.5 per cent of gross domestic product in 2006 to 4-5 per cent next year. Strengths in the US economy have been ignored because of concerns about credit ratings. However, dollar weakness has stemmed not just from subprime concerns, but from US foreign policy imperatives in China and the Middle East. The greatest continuing risks are not to be found on Wall Street, but in Beijing and Riyadh.

The dollar’s weakness reflect new market apprehensions about both the economy and the dollar’s status as a reserve currency in the Middle East and Asia. Wall Street has produced a credit crisis for banks by securitising more than $900bn (€606bn) of subprime mortgage loans. The ultimate default rate on these loans could rise as high as 20-25 per cent, so there is $200bn-$250bn of bad paper now circulating in the financial system. As the credit rating agencies have issued widespread downgrades of securities that previously had scores of triple or double As, investors have taken fright and been fleeing all asset-backed securities.