Reports of the US dollar's death have, so far, been greatly exaggerated. It is still, by far, the most liquid currency in the world. The US has the deepest and most liquid capital markets in the world, despite all its sub-prime and banking difficulties. The dollar is used on one side of the vast majority of currency trades.

If someone wants to swap out of Brazilian reals into, say, Korean won, it's typically a two-step process n from reals into dollars and then from dollars into won. Central banks in the emerging world mostly hold their - in some cases, huge - foreign exchange reserves in the form of US dollars. It is, therefore, the international currency of choice. It remains the world's reserve currency.

For the US, this makes life very easy. It can issue huge amounts of dollars knowing that people on the other side of the world will happily stash them away for a rainy day. That means the US can raise funds more cheaply in international capital markets than others can. US trade can be cheaply financed because the US doesn't often have to pay of currency conversion costs. And it can happily run a large balance of payments current account deficit year-in, year-out, without any significant costs to the American people.

For the rest of the world, the dollar's reserve currency status is a mixed blessing. While it's useful for other countries to have access to an international medium of exchange and store of value, the dollar is ultimately under American control.

Should there be a conflict between the interests of American voters and foreign creditors, the foreign creditors will probably lose out. Today, those creditors - many of which are emerging market governments and central banks - have built up trillions of dollars of holdings of US assets. Is their money safe? If not, what should they do about it?

When governments were happy to grant central banks independence in the pursuit of price stability, there were few reasons to worry. The credible pursuit of price stability kept domestic voters happy but, at the same time, enhanced reserve currency status. If other nations with no great record on the control of inflation could somehow tie their currencies to the dollar, they might be able to benefit indirectly from the aims of the Federal Reserve. And so it has proved.

Although countries like China have been accused of tying their currencies to the dollar for purely mercantilist reasons, the truth is a bit more complex. For the People's Bank of China, the link between the renminbi yuan and the dollar has been an important source of domestic monetary and financial stability.

With the onset of the credit crunch, the relationship between governments and central banks has begun to change. Quantitative easing works either by increasing the money supply or by increasing the velocity of circulation of money. Either way, the idea is to raise the value of output by boosting volume or price.