In the 1970s, John Connally, President Richard Nixon’s treasury secretary, famously quipped to a group of visiting Europeans that “the dollar may be our currency, but it’s your problem”. One of the arguments in favour of establishing the euro was that it would quickly come to rival the dollar’s status as the world’s principal reserve currency and make it hard for the US to abuse its “exorbitant privilege”: devaluing the dollar imposes few costs on the US because its foreign debt is denominated in dollars. Is the wish of those Europeans who want to see the dollar dethroned about to come true? If so, would this be a win-win scenario for the eurozone?

There is no doubt that the threat to the dollar’s status is bigger than at any time since the end of the second world war. The most likely outcome is that a rapid narrowing of the US current-account deficit and renewed fiscal discipline will combine to restore confid­ence in the dollar and that it will retain its status as the world’s leading reserve currency. Confidence in long-term US economic prospects remains strong and America’s huge and liquid financial markets make the dollar a highly attractive reserve currency.