If John Rusnak had only been able to hang on for a few more months, he might have got away with it. The dollar is at last on the slide.

Before his downfall in February, the Allfirst currency dealer ran up massive losses over five years betting that the greenback would fall and that the Japanese yen would rise.

The dollar defied the text books, however, and stayed strong despite the technology meltdown and the slump in the US economy.

Investors worldwide continued to believe through the turbulence of the last two years that they could get higher returns in US asset markets than elsewhere, and capital drained from other countries into the United States.

Now it is flowing out. The US currency yesterday touched a five-month low against the yen in Tokyo as speculation mounted after an increase in Japan's industrial output last month by 0.8 per cent that the Japanese economy had hit bottom and was on the road to recovery.

The dollar has also been losing ground against other currencies, slipping to a seven-month low against the euro yesterday after a roller-coaster ride since early April.

The euro was quoted at 92.08 cents in midday trading in New York yesterday, up from 92 cents on Friday.

The markets are still volatile and can be affected by geopolitical events or Japanese intervention to keep the yen down. But the enthusiasm of foreign investors for dollar-denominated equity markets has markedly waned as doubts grow over the durability of the US economic recovery.

US stocks are still overvalued, analysts say. Tech stocks in particular are expensive and investors have become more sceptical that Nasdaq gains on any given week signal the end of the downside, Mr Stephen Milunovich, chief global technology strategist for Merrill Lynch, said yesterday.

The massive and growing deficit in the US current account, driven by consumers who have spent their way through the downturn, also has investors worried. JP Morgan estimates that the US deficit will rise further to $492 billion (€534 billion) or 4.6 per cent of US gross domestic product this year.

There are growing doubts abroad about the ability of the US to keep attracting enough foreign funds to cover the deficit. This strengthens pressure on the Bush administration to talk down the dollar to increase exports and reduce imports.

The perception that the dollar is vulnerable in itself could speed a further fall in its value, with foreign investors scared off and global currency dealers inclined to get rid of dollars and bet on other currencies.

If equities make a strong showing, there could be a respite. All the main indices fell yesterday after a bigger-than-expected decline in a key gauge of US economic activity amplified doubts about whether the strong pace of the recovery in the first quarter can be kept up.

The New York-based Conference Board said its Index of Leading Economic Indicators fell by 0.4 per cent in April, the first time it has declined since September.

Real money supply, stock prices, consumer expectations, initial unemployment claims and the interest rate spread all declined in April.

The effects of a weaker dollar will be felt in the euro zone where one-fifth of corporate revenues comes in the form of dollars. Healthcare is one of the most exposed sectors, with companies like Elan getting more than 50 per cent of revenue from the United States. European airlines will benefit as they must purchase aviation fuel in dollars, says Credit Suisse First Boston, in particular Ryanair and Finnair.

US multinationals with sales in the euro zone can also expect increased competitiveness and profitability.

Some US analysts see the decline in the dollar as a natural correction from higher levels.

"We do not believe sustained dollar weakness is imminent," said Mr Rod Smyth, chief investment strategist of First Union.

"Given continued high US economic productivity and full economic recovery this year, we expect the dollar to find support as it equilibrates with renewed growth in the rest of the world."

Editorial Comment, page 15