The euro has again fallen below 90 cents for the first time since May as the dollar strengthened on positive US data and disappointing German data. The currency has been weakening since mid-June, when its brief rally came to an end. This latest downward movement came after disappointing German unemployment figures and worse than forecast industrial production numbers, and contrasting US figures showing productivity in the second quarter racing away at 5.3 per cent.

Before this most recent slump in the euro's fortunes, the Governor of the French Central Bank, Jean-Claude Trichet, who is also a member of the European Central Bank Governing Council, told the House of Lords in London recently that the euro has "great potential for appreciation" and that "the fundamentals in Europe are clearly indicating the euro is undervalued". He stressed in particular euroland's surplus current account position compared with the US's soaring deficit.

Mr Trichet told the House of Lords that he and his colleagues on the ECB governing council were "absolutely convinced" that the euro exchange rate would appreciate and that this view was shared by market participants.

Mr Trichet's claim may seem perverse in light of the euro's latest travails. However, there is a good case for saying that the US rather than euroland faces a looming currency crisis. In fact, as the markets take stock of this new economic reality, there is a real possibility the dollar will decline in an even more spectacular fashion than the euro over the last 18 months.

The logic is straightforward. The dollar's inexorable rise has been based on the belief that the US economy as a whole, and its equity markets in particular, can continue to defy gravity. Investment funds have poured out of the euro zone, attracted to the superior returns in US markets, bolstering the dollar and causing the euro to plummet.

While most currency analysts continue to argue that the euro will remain weak for the foreseeable future, I would seriously question this received wisdom and believe that the euro could appreciate strongly during the next year - reversing its slide since the beginning of 1999.

The dollar's excessive strength may keep US inflation down in the short term, but it exaggerates the imbalances in the US economy by over-stimulating its domestic sectors and by helping to inflate the bubble in US asset markets. A too-sharp appreciation in the euro over the next year could create similar policy dilemmas for the ECB, and potentially undermine the recovery in parts of the European economy.

In the US, with the presidential election rapidly approaching, political concerns predominate. If the administration tried to force the dollar down, the Fed would have to accelerate its programme of rate rises. That would be politically unpalatable for the Clinton administration, even if it resulted in a softer economic landing in the medium term.

As British Chancellor Gordon Brown would also admit, a strong currency may damage exporting companies, but it ensures that most voters feel wealthier, thanks to cheaper imports or holidays abroad. A number of European countries - particularly Germany - continue to enjoy rising exports as a result of the falling euro. Rather, euro weakness has been an embarrassment for the European leaders who promised the euro would be strong. By far the most damaging impact of the euro's decline is that the single currency is losing some credibility among Europe's citizens.

Ironically, it is in Britain - far less able than the euro zone or the US to move currency markets - that the debate about intervention has been most intense. But the focus has been on the virtues or otherwise of a strong pound and a weak euro, rather than on the broader question of currency misalignments.

As the Bank of England is acutely aware, the pound looks almost as vulnerable as the dollar to a sudden surge in the euro, which would oblige it to raise UK interest rates further.

Trapped between two great currency blocs, the British government looks powerless to ease sterling's problems without support from the EU and the US.

Economist Dr John Ryan is a euro expert attached to PA Consulting Group, Dublin