In November 1999, the US Trade Deficit Review Commission suggested that the dollar had to drop in value by about 40 per cent if the American economy was to end its trade deficit -- which was running at about 4 per cent of GDP (by way of reference, India has never run a deficit of even half that level).

Those on the commission included economists like Lester Thurow of MIT and Anne Krueger of the IMF, but also such Bush administration worthies as Donald Rumsfeld and Robert Zoellick, not to speak of one of Zoellick's predecessors, Carla Hills.

Any suggestion in any country that its currency has to drop in value by 40 per cent would be pretty drastic. By way of comparison, India devalued by only 25 per cent in 1991, and about 35 per cent in 1966.

The 1966 event was traumatic for both the economy and the policy-makers of the time, the 1991 action was better managed and brought the economy into balance.

What would such large-scale devaluation of the dollar do, not just to the American economy but to its trade partners as well?

We may soon find out. In late 1999, a euro fetched only 85 cents; now it fetches $1.27. Believe it or not, that's a dollar devaluation of close to 50 per cent in just over three years. And it has happened without too many people noticing, indeed with barely a hint from Washington that it might favour a slightly weak dollar.

Now, it might be argued that European currencies had risen against the dollar by 23 per cent in the four years before the trade deficit review commission's report, and so the reverse movement of the past three years is in part a correction.

Perhaps, but even allowing for that, the dollar has shown a significant drop against the euro.

When the commission submitted its report, the American trade deficit was principally with China and Japan, apart from Europe.

But China has shrewdly avoided any negative consequences of the dollar devaluation by tying its own currency to the dollar, and it is no surprise therefore that China continues to have huge trade surpluses with the US.

Japan's yen too has remained more or less unchanged, with minor annual variations. So the real impact has been on the euro and on some other currencies.

Such sharp exchange rate fluctuations for the world's largest economy cannot but have their impact on all other economies, as we saw in Japan when the yen was forced to rise sharply against the dollar from the mid-1980s, for this eventually contributed to the end of the post-war Japanese boom and caused a lasting recession (compounded of course by domestic failures).

The big question is whether history will now repeat itself with Europe, already struggling without any real economic momentum and now saddled with an unfavourable currency valuation as well.

This suggests five conclusions, and some concerning India.

First, the US trade deficit may not end because of the Chinese and Japanese currencies moving down with the dollar, and these two countries account for about half of America's trade deficit.

Second, Europe is going to struggle and giant economies like Germany's will not find easy answers to their problems.

Third, President Bush will probably have a favourable economic wind in his sails as he heads for re-election, as the US economy gains in strength, so the Democrat cry of 'jobless growth' will lose steam.

Fourth, as confidence in the US economy grows internationally, the smart money could once again head willingly for the US, especially if its faster economic growth causes imports to rise.

And fifth, countries that have soft currencies (like China) will feed most of those American imports, not countries with strengthened currencies like those in Europe.

India is a peripheral player in all this. It has a 2:1 advantage in its trade with the US, but that's not saying much when America's over-all import-export ratio is nearly 1.5:1.

With the rupee having stopped its climb against the dollar, and therefore having fallen against other currencies (including the yen and pound), Indian exports should continue to have a relative price advantage. As for the government, it should persist with opening up to imports.