The rebound of the dollar at the height of last year's financial crisis was one of the few silver linings for policymakers. Increased risk aversion prompted investors to return to the safety of liquid US Treasuries, averting a collapse of America's currency.

This year the greenback has weakened again as risk-seeking US investors have bought higher-yielding foreign assets. This dollar weakness should be benign and the currency is likely to strengthen if investor bullishness eases. But a collapse of the dollar would have grave consequences for the world economy. Already officials at the Bank of Canada and the Reserve Bank of New Zealand are warning about developments in the currency markets. This month G20 policymakers should discuss exchange rates when they meet in Pittsburgh.

A plunge in the dollar would hurt America's economy. Foreign investors would demand higher returns for holding US assets, causing bond yields to steepen. But extreme dollar weakness also poses a threat to the rest of the world. For most of this decade, the world economy has been able to accommodate sliding currencies as global growth has boomed. But in the credit crunch world, a super-weak dollar risks exporting deflation across the globe.