War in Iraq is melting down US resolve. In Lebanon, another assassination and another political crisis have highlighted America's weakness and the ascent of its adversaries, Iran and Syria, in the struggle for power in the Middle East. On the streets of London, lethal radiation strikes down an enemy of Mr Bush's old friend, Vladimir Putin.

And just when you think War, Death and Pestilence have the field all to themselves, along on the rails comes the fourth horseman - the nightmare of every beleaguered US president - a collapsing dollar.

The US currency has been in something of a crisis this week, falling by three cents against the once-derided euro and by almost seven cents against the pound. Measured against a basket of the world's main currencies it is down by more than 2 per cent in a week. That may not sound like much, but when you consider it is more than the dollar has moved over the previous six months, it qualifies as an Event.

Nothing seems to capture the symbolism of a nation's decline better than a falling currency. For some countries - I'll name no names, but think pasta and a penchant for loud, animated chatter - a foreign-exchange crisis is part of the national culture: a condition so habitual they contrive to achieve it even when they no longer even have their own currency.

For others, the spectacle of traders dumping the national currency down the nearest obliging central bank is unnerving but not always as devastating as it first appears. We used to have such crises periodically in Britain until we cured ourselves one night in September 1992 when Norman Lamont announced his humiliation and the pound's liberation from the European exchange-rate mechanism. The dollar is still different, however. Its value on the foreign exchanges doesn't matter to most Americans, who have little need of foreign money, But for years now policymakers have seen a strong dollar not only as protection against runaway inflation but as a sign of global confidence in the US.

With the currency closing in on its lowest level against the euro, and the mythically significant two-dollars-to-the-pound rate, that leadership looks as challenged on the trading floors of London and New York as it does among the sandbags of Anbar and Fallujah.

The last time the dollar fetched only 50 British pence for longer than a trading day or two was in the spring of 1981, when America was in its deepest recession since the 1930s, inflation was more than 10 per cent and the nation was still in shock from the attempted assassination of its president.

Is the dollar's latest swoon another signal of declining American heft, an economic shock to match the political-military blows of the past few years? The short-term factors behind the dollar's decline would suggest so. The immediate changes this week seem to have been prompted by a firming in trader sentiment that, for the first time since the euro was founded, conditions in Europe look rosier than in the US. This would mean the US Federal Reserve cutting interest rates next year, while British and European rates are going up.

In the longer-term perspective too, the dollar's fall looks like a kind of great reckoning for profligacy. The fall this week has merely extended a decline that has been in place since January 2002. In that five-year span, the US currency has fallen by about 18 per cent against those of its main trading partners. This seems to have been driven in large part by America's indebtedness to the rest of the world. The US is running a current account deficit of roughly $800 billion, or about 7 per cent of its total national output.

But none of this means the American economy is doomed. The exchange rate merely reflects the changing premium that investors demand for investing in the US. Investors may have grown more concerned about placing their money in the US in the past year, especially as European and Japanese performance has improved. But that simply means they demand a lower price for investing there to protect them against further dollar depreciation. The dollar surely needs to keep on falling. What matters is that its drop is an orderly and stable one, not a sudden collapse.

So far the decline has been remarkably steady over the past five years, and there is no real reason to think it will not continue - thanks mainly to China. While private investors may have grown wary of the US, the Chinese Government has been doubling its bets there, investing in US official debt, keeping American interest rates low and the economy expanding, and at the same time ensuring that American consumers keep buying Chinese-made goods.

The Chinese understand that the dollar needs to fall much further; but a sharp and disorderly drop is no more in Beijing's interests than it is in Washington's. They can presumably be relied on to manage the dollar's decline.

Uniquely in the modern history of international financial markets, the world's most important currency is underwritten by the economic policies of another country. That may be uncomfortable for both of them. But it represents far from an Apocalypse for the US economy - more a kind of Revelation for a beleaguered president.

In spite of recent foreign currency movements, the ECB is expected to press ahead with another quarter-point rise in its main interest rate to 3.5 per cent next week. But, if sustained, the euro's appreciation could curb the scope for further rises in borrowing costs in 2007. Mr Breton's initiative may have been aimed at setting the tone in the debate on monetary policy action beyond the December 7 ECB meeting.

French anxiety, which compared with a more relaxed mood in Germany, has been heightened since the economy ground to a halt unexpectedly in the third quarter, after an exceptionally strong second quarter. That has prompted economists to cut their growth estimates for the year to the bottom of the government's target of 2-2.5 per cent.

A French official said Mr Breton had deliberately changed his tone on the euro, from saying it was "fully valued" when it was trading at $1.24-$1.28 against the US dollar, to calling for "collective vigilance" now it was above the $1.30 mark.

But Olivier Garnier, economist at Société Générale asset management, said the ECB was becoming "a favourite scapegoat for politicians", letting them score points with voters by criticising the euro or interest rates, without being punished by financial markets.

Ernest-Antoine Seillière, president of Unice, the European employers' organisation, also said the ECB and eurozone finance ministers should be "more concerned about currency developments" and that the ECB should put interest rate increases on hold.

However, Jean-Claude Juncker, Luxembourg prime minister and political head of the eurozone, played down fears about the impact of the rising euro on exporters. "I don't think we have to be concerned now," he said. "We are lengths away from the critical zone."

Mr Juncker believes the eurozone economy's revival is robust enough to survive a rise in the exchange rate and says he was more concerned when the euro was so weak that it was trading below parity with the dollar.

In recent months, Mr Juncker has tried to restrain fellow ministers from making implicit criticisms of the ECB's interest rate policy, which he fears are counterproductive.

However, his colleagues around the table are less phlegmatic, particularly those from countries such as Spain, with industries struggling to maintain competitiveness on world markets.

Virgin Atlantic reports that bookings to New York are up a fifth on a year ago, while reservations for Christmas holidays to Miami and the Caribbean are also flooding in. The airline will announce today it is raising Caribbean capacity by 20% to cope with mounting demand.

"Brits will always look for a bargain and if the bargain is in New York on the back of better exchange rates then they will take it," said Virgin's Paul Charles. He even suggested that many travellers were celebrating their cheaper holidays by booking seats in first-class and business.

One of the most popular items on the dollar-denominated shopping is the iPod. The new video version costs around £190 this side of the pond while in the United States they can be snapped up for the equivalent of £128. One transatlantic shopper, Laura Collett, a 27-year-old accountant from the Midlands, said a recent trip to New York was also easier on the mental maths than usual.

"It was good because you could just basically halve the price to get sterling," she said. Jumpers from Abercrombie, a necklace from Tiffany's and make-up from Bloomingdales department store all came in at a pleasantly lower price. "Nice surprise when the credit card statement came through," she said.

The pound's rise has less to do with strength over here than with the weakness of the dollar. The US currency came close to a two-year low against the pound and tumbled against other currencies last week on the back of a gloomy outlook for the world's largest economy. Traders expect softer inflation and slower spending could usher in interest rates cuts within months. All of which could mean that the dollar soon breaches $2 to a pound for the first time since 1992.

The Institute for Supply Management index on US manufacturing activity fell unexpectedly to 49.5 in November from 51.2 in the previous month. Economists had forecast a slight rise to 51.5.

This was the first time since April 2003 the figure has dropped below the 50 level, which marks expansion from contraction. Within the overall index, new orders, which gauges future growth within the sector, tumbled to 48.7 from 52.1 in October. Employment also showed contraction, with the index falling to 49.2 from 50.8.

At the same time the prices paid index, a measure of inflationary pressures within manufacturing, climbed a hefty 6.5 points to 53.5. The dollar continued to weaken on the news and looks set to remain under pressure, with one economist describing the US currency as "toast." Analysts said it is only a matter of time before sterling hits the magical $2 level, with some suggesting it might even be breached later today.
Omer Esiner, an analyst at Ruesch International, said: "I think this number will definitely continue to fan fears of a hard landing for the US economy."

Today's US data follows figures on Thuesday which showed a large contraction in manufacturing activity in the Midwest, raising expectations that the Federal Reserve will cut rates next year.

The continued dollar weakness weighed down Wall Street, with the Dow Jones Industrial Average dropping 80 points to 12,142 by 3.45pm.