Economics: If the dollar is a rug waiting to be pulled then we - like no one else in Europe - are standing on it. In his book The Dollar Crisis, economist Richard Duncan of ABN-Amro says there are "half a trillion reasons" why the dollar must collapse. US multinationals account for about 90,000 jobs in the Republic, while the US is our largest export market, accounting for one-fifth of our exports.

In the past seven days some pretty important people have been clearing their throats about the dollar and its impact on our competitiveness. As it approaches the psychological barrier of $1.30 to the euro, the dollar's destiny may soon be linked with ours.

At its present level against the euro - $1.27 at the time of writing - the greenback's level is 8 per cent weaker than the beginning of the year. It is also 8 per cent weaker than when the euro began life on January 1st, 1999 (it was then $1.18). It breached the $1.30 barrier in February and March of last year, before strengthening over the rest of 2005. This time, there is a chance that the dollar will not only breach $1.30, but keep going towards $1.40 or even $1.50.

Like Duncan, many economists have predicted a dollar collapse on the basis that market "fundamentals" are moving against it. But what is important to note beforehand is that these so-called fundamentals influence currencies in the long term.

To understand their role, think of a lump of butter stuck to a wall. A fundamental force - gravity - is drawing it down. It will eventually fall. Now, butter has a sticky quality to it that will keep it stuck to the wall for some time. But it's a safe bet that if the temperature in the room rises enough, the butter will head south fairly quickly.

Turning to market fundamentals, what exactly are they? The first is a persistent deficit in the US current account on the balance of payments. Put simply, Americans consume more than they produce. From a position of balance in 1992, attained after years of a weak dollar, the US current-account deficit has ballooned. US imports exceeded exports by 5.7 per cent of gross domestic product (GDP) in 2004 and the deficit is getting wider.

Keep buying more than you sell, and the supply of your currency exceeds its demand unless the government compensates by running a surplus (which allows it to increase demand for its currency by buying back debt). In the US, the government is running a hefty deficit of 4.7 per cent of GDP - partly thanks to the Iraq war - thus adding substantially to the supply of dollars on world markets.

In his book, Duncan outlines why, to date, this situation has not resulted in a dollar crash. Nations exporting to the US, such as China, have feared that, were the dollar allowed to fall, the impact on their exports would be disastrous. Such surplus nations have invested half a trillion dollars in the US, purchasing a range of real estate, equity and fixed-income assets, propping up the dollar in the process.

But the extent of lending to US businesses and consumers that has been part of this story has become so great that US growth - strong since the 1980s - is feared to be unsustainable.

The rest of the world now owns about $4 trillion worth of assets in the US. According to Duncan, it is starting to worry about this investment but is caught in a trap. If states switch too quickly, the dollar will collapse and wipe out its value.

But Duncan maintains that the value of US corporations has already been over-inflated by foreign investment and will soon be unable to convince foreign investors to make the scale of investment needed to prop up the dollar. The US government can borrow on world markets for a while yet, but only for a few more years.

In the meantime, globalisation and the advent of the euro may act as important catalysts for the inevitable. The rise of India and China replaces the US economy as the engine of world growth and creates huge export markets. For many exporting nations, fear of a falling dollar is no longer what it was.

At the same time, the success and increasing prominence of the euro makes it a potential alternative reserve currency for central banks, although this status is still probationary.

This may be the year in which the tide turns against the dollar. As the US Federal Reserve signalled a strong tightening phase, the European Central Bank (ECB) was just getting warmed up to raise rates. For currency traders, this signalled that the future return on dollars would rise relative to the euro in the near term.

But this situation is changing. The Fed has done most if not all of its tightening. The ECB, by contrast, is getting into full stride and signalling at least a further percentage point increase in rates over the coming year. Remember that lump of butter sticking to the wall?

But how far could the dollar fall? Between February 1985 and December 1988, it fell from a cyclical peak by 50 per cent against the deutschmark and the Japanese yen. The fundamentals of the US economy are now far worse than back then.

On the other hand, the dollar has already fallen about 40 per cent from its last cyclical peak. Many currency traders see $1.40 as a reasonable floor, although a floor of $1.50 is not impossible. In the worst case, then, the dollar could fall by a further 17 per cent from where it now stands.

How hard would this hit the Republic? In its latest quarterly review of exports, the Irish Exports Association (IEA) says that despite growing by 8 per cent overall in the first quarter of the year, exports to the US rose by just 1 per cent. This was against an 8 per cent fall in the dollar during that period.

IEA chief executive John Whelan expressed concern about the Republic's ability to retain export market share in the US if the euro/dollar exchange rate stayed at $1.28. At that rate, he predicts it will fall from 20 per cent last year, to 16.7 per cent this year. If this is true, a further 17 per cent decline in the dollar's value could greatly affect narrow-margin exporters, not to mention tourism.

The last word on this should go to our American cousins. In a survey of US companies located here, the American Chamber of Commerce in Ireland found that 43 per cent indicated that the Republic was no longer "a preferred location" for further investment". Forty-one per cent said it was not as attractive as when they first set up business here. The chamber's president, Dr Fraser Logue, warned that the cost, productivity and flexibility of labour was becoming a major barrier for investment.

The Republic's attractiveness is hanging in the balance. A dollar downfall could tip that balance against us.