How far might the dollar fall? By as much as 50 per cent from its peak, in trade-weighted nominal terms, suggest two distinguished international economists, Maurice Obstfeld of the University of California, Berkeley and Kenneth Rogoff of Harvard.* Up to now, the fall has been just 17 per cent, on a broad trade-weighted basis (see chart). More, it seems, is on the way.

The work of these two economists assesses the real exchange rate adjustments needed to reduce the US current account deficit. But a prior question is whether such a reduction is needed. The honest answer is: nobody knows. But it is easy to accept that the present path is unsustainable, since both the current account deficit and external liabilities are on an explosive upward trajectory. On current trends, the current account deficit might even jump from 6 per cent of gross domestic product to as much as 10 per cent by the next decade.