I chanced to be in Canada last week on the very day that the Canadian dollar hit parity with its more glamorous American counterpart for the first time in 30 years.

The “loonie”, as it is popularly known, in what may be the most unfortunate example of cross-cultural verbal ambiguity since Omar Bongo became president of Gabon, has, with the other major currencies, been ascending steadily against the greenback for more than five years.

But parity was still a banner day in Canada. The story dominated the news; taxi drivers ribbed American visitors about their unwonted equality; currency traders at the Royal Bank of Canada in Toronto stood at their desks and clapped and cheered at the historic moment.

I’m getting to be something of a Zelig figure in the narrative of signal events in foreign exchange history, because I can also recall being in Japan the day that the yen hit the magical Y100=$1 mark back in the mid-1990s. This, too, induced an outpouring of national pride reserved in the past only for the enthronement of emperors and outrageously bold acts of war. Having started out 50 years earlier at 360 to the dollar, the yen was now finally worth a whole US cent and the Japanese partied like it was 1941.

The relationship between exchange rates and patriotic sentiment is an interesting one. The currency remains a symbol of national identity and pride for most countries – a national identity and pride that the European elites, of course, are busily trying to erase and replace, though without obvious success. Ask yourself: did anybody in Europe feel an electric surge of European pride when the euro hit its highest ever level against the dollar last week? Did currency traders in Frankfurt burst into a rousing rendition of the Choral Symphony?

For all currencies, however, even for those that are backed by popular national legitimacy, virility on the foreign exchanges is a mixed blessing.

The yen’s parity with the US cent in 1995 and after (the dollar eventually dropped as low as Y80) did the Japanese economy no good whatsoever. It spent the next seven years trying and failing to extricate itself from the devastating effects of deflationary pressure and export-crushing global competition.

This, by the way, is an important factor in the Chinese reluctance to revalue their currency sharply, as they are constantly urged to do by US politicians. They look east, towards Tokyo, where policymakers were similarly encouraged by Americans to push their currency up and the dollar down – and think “No thanks”.

Parity for the Canadian dollar and record highs for the euro will have their downsides, too. The Canadian economy looks robust now, backed by soaring prices for its natural resources, but even Canada’s competitiveness will be hurt by an overvalued currency. In euroland, the pips are already squeaking. Nervous French politicians are protesting that the soaring currency will kill off their still-infant recovery after the long stagnation of the past decade.

Yet, despite the complaints, this will all be manageable. In fact, it is, despite the hysteria induced by the sub-prime mortgage crisis, merely the latest stage in the continuing rebalancing of the global economy.

The weak dollar is now clearly reversing the unsustainable patterns of the recent past. The US current account deficit, which was above 7 per cent of GDP last year, is now veritably tumbling – 5.8 per cent in the last quarter. The fact that US growth is slower than Europe and Japan’s rate combined is helping in this rebalancing, but so, too, is the 20 per cent depreciation of the dollar since 2002.

In America, where I would wager that not one person in a hundred could guess to within 25 per cent the exchange value of the dollar against any currency in the world, pundits and policymakers are less worried about the blow to their national pride than they are by the potentially destabilising effects of overrapid declines in the dollar’s value.

There are, broadly, two main types of risk. First, that the falling dollar will induce a global collapse of confidence in US assets. There were hints of this last week, when it was reported, incorrectly, that the Saudi authorities were breaking the peg with the dollar and seeking to diversify their foreign exchange reserves.

You have only to look at what exchange rate movements have done for investments in the United States in the past year to get a sense of the danger that a falling dollar can do for global investors. The S&P 500 index is up 8 per cent from the start of the year in dollar terms. But if you’d exchanged euros for dollars to buy it in January, you would have seen no gain at all in your investment.

A full-scale run on the dollar would also be alarming because of its potential inflationary implications. The Federal Reserve’s aggressive interest-rate cut last week shows the central bank has gambled that the threat of recession is large enough to bury for a while its inflation concerns. But if the currency keeps falling, the increase in import prices could become embedded in consumer expectations and force the Fed actually to raise rates at a time of weakening domestic demand.

So far, I detect no sign of incipient panic among policymakers, however. The dollar may have further to fall and capital inflows are clearly slowing – but we may be nearing a turning point. As I’ve noted already, the current account deficit is falling sharply. In purchasing power terms, the dollar is now absurdly out of whack with all other currencies, as anyone who has bought a five-dollar ice-cream in London can attest. In any case, the financial turmoil in the UK in recent weeks and question marks over the Bank of England’s credibility may start to produce a fall in sterling – at least one of the important cross-rates. Even if the dollar does fall further, if the US economy avoids a recession in the next few months – still a probability – expect the greenback’s long slide to begin to reverse. The Canadians will then be able to celebrate parity again, only this time the loonie will be moving in the opposite direction.

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