The saga of the declining dollar has turned from a drama into a crisis.

We’ve got used to having Chinese officials hinting darkly that they might diversify their foreign exchange reserves out of the US currency, as they did again last week. We can even take it when Bill Gross, the world’s most influential bond investor, tells the public, as he did, also last week, that their investment strategy should consist of not buying anything that has a dollar sign attached to it.

But when Gisele Bündchen, the Brazilian supermodel, trashes your currency by insisting that she wants to be paid in euros, not dollars, it really hurts.

Since the dollar began its long decline against the world’s currencies in early 2002, the mantra from financial pundits has been that as long as the decline was orderly, everything should be all right. The dollar was overvalued; it would have to fall to get the current account deficit down – and economic fundamentals were against it. Wisely, of course, no one ever tried to quantify what exactly “disorderly” would look like. It was generally asserted that, like the difference between art and pornography, you would know when something had gone from being orderly to disorderly without necessarily being able to define it.

So, is disorderly best measured in terms of scale? If you had told a British investor six years ago that his weakly pound sterling would buy two dollars and ten cents in six years’ time, he would have reasonably presumed you were describing the end of the world. But then some people insist that the scale of the movement is not what matters but the speed at which it happens. You could still argue that the 35 per cent appreciation of the pound against the dollar and the 45 per cent rise of the euro in the past five years has been fairly steady.

Now, however, the pace seems to have picked up. The Canadian dollar is up against its cheaper US counterpart by almost 20 per cent this year. It’s hard to retreat in an orderly fashion at that kind of pace. And when the currency moves as much as 1.5 per cent in a day, as it did one day last week against the euro, then perhaps D-Day - Disorderly Day - has finally arrived.

And yet, for now, US policymakers seem unfazed. The Treasury will not change its increasingly comical verbal support formula of “a strong dollar is in our nation’s interests”, nor will it countenance – wisely – actual intervention to prop up the currency. Last week, the Federal Reserve, in the person of Ben Bernanke, gave a careful “on the one hand, on the other hand” assessment of the dangers of a rapidly falling dollar. No alarm there.

Abuse, of course, is being hurled at them from all quarters. From the Left, the dollar’s decline is seen as the global financial markets’ equivalent of the raised middle finger that greets President Bush almost everywhere he goes. They blame him for everything from the war in Iraq to Hurricane Katrina and say that the devaluation of the dollar is the hard market price of the loss of confidence in America’s leadership. This is not the place to argue about the merits of his policies, but I’d have thought it’s a bit of a stretch to say they’re to blame for the dollar’s weakness. Even if you think the currency movement reflects in part the strength of oil prices, which it may, you can’t really argue that is all about US policies. High energy prices still seem to be driven more by strong demand than geopolitical concerns.

From the Right comes even fiercer criticism. The obsessive types who think that everything went wrong when the world went off the gold standard 80 years ago - and who continue to have a suprisingly large following in America – say that the Federal Reserve has debased the currency. It is tiresome to have to listen to this rant about how the Fed’s rate cuts in 2001-03 undermined faith in the US dollar and how the latest easing has weakened it further. It’s not wrong, of course, to state that lower interest rates are likely to reduce demand for a currency, but what exactly was the alternative?

The US central bank averted a recession with its loose policies. Would the dollar be stronger or weaker now if the United States had had a nasty recession in the past five years?

Two factors are driving the dollar lower. The first is the steady, benign but unsettling unravelling of the financial imbalances that have haunted the world for five years. US growth is weakening relative to other developed countries and the current account deficit is narrowing. These are both desirable, but destabilising.

The other factor is increased discretionary demand from the world’s central banks to diversify their currency reserves out of dollars. This is often hailed, especially in Europe, as a sign of America’s declining global power, but the reality is that some rebalancing of global currency portfolios was necessary and inevitable. For years the US has provided a fifth of world demand and four fifths of world reserves.

The increased demand for euros does not signal either, as some claim, investors’ preference for European policy or the rise of a European superpower. Europe’s long-term relative economic decline remains on track. A stronger euro does not betoken a resurrection anytime soon.

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