Economic adjustment is highly frustrating for economic commentators. It takes so long to arrive that you lose much credibility arguing it will come. In the process you come to be viewed as a slightly embarrassing eccentric of the old-school that just doesn?t ?get? the New Economy. When the adjustment arrives, most of it is over before you have had time to say I-told-you-so. Your prognosis of ?adjustment underway?, laced with a frustrated ?I-told-you-so? is deeply uninteresting to head-line writing journalists. They are drawn to the sexier prophets of Armageddon.

Adjustment is well underway; armageddon will have to wait another day. Savings in deficit countries have risen sharply. The US savings rate will rise towards 10% from zero. The US current account deficit will be below $400 billion this year, almost half of its peak just a couple years ago. Global imbalances are dissolving. A large part of this adjustment is being driven by retrenchment in consumption in the US. Between 2007 and 2010, US consumption is likely not to grow at all, compared with previous growth of 3-4% pa . The next part of the international adjustment may have as much to do with the dollar?s new-found competitiveness.

The dollar is now significantly undervalued versus its fair value on a price-competitiveness basis. The last time we saw such undervaluation was 15 years ago in the mid-1990s. Fair value for the euro, estimated by normalising exchange rates for differences in inflation, is $1.15-1.20, for sterling it is $1.50-1.55. It is harder to work our fair value for the Japanese yen, Canadian dollar and Indian rupee given a number of domestic exceptions, but it is probably some 25% higher for the dollar than current levels.

Whenever you reach points of significant deviations in valuation there is always a story that explains why ?this time is different?, why past valuation norms are irrelevant, and why the move has only just begun. Today I am better known by journalists as a dollar bear, but I won my first major economics prize for arguing, in 1994, that the dollar was not heading for zero. Back then the story was the US was inherently uncompetitive at producing exports relative to Japan and Germany and US savers were about to reverse an under-exposure to overseas assets. Today the argument is that the US has a structurally large amount of debt, it is losing its economic pre-eminence and the emerging powers are looking to reduce their use of the dollar. The Chinese have already started making currency swap arrangements with a range of trading partners that by-passes the dollar. The arguments today, as in 1994, are not wrong or unimportant. It is just that there are other things going on at the same time.

One of the things that market participants get wrong is that they think the only way countries can shift their reserve holdings out of dollars is through the market place. ?Heavy-weight? economic journalists then revel in the apparent paradox and write that these countries cannot decide to get out of dollars because selling dollar reserves would hurt them as the dollar falls in value. This is not how it would happen. If the Chinese were concerned about the long-term value of the dollar they could, one Friday afternoon, call up the ECB and say that they would like to swap $1trn of dollars for euros at the prevailing exchange rate directly with the ECB. The ECB would rather print $1 trillion worth of Chinese euros for dollars than have the euro jump appreciate on the foreign exchange markets to a point that eviscerates European exports. The question is not the public sector?s actions, but how the private sector would react to that announcement on the following Monday. Would market participants decide that the action by the Chinese reinforced the view that the dollar was in trouble and so they would try and sell dollars on the exchanges. This is what happened after the 1968 Basle Agreements by central banks not to sell sterling on the open markets. Or, would they decide that with the dollar overhang moving from a potential seller to a less willing seller, they should exit their dollar-short positions, thereby pushing up the dollar.

My underlying observation is that while we are probably at the beginning of a shift in currency power, while there are significant risks for the dollar, the path will not be a clear one from here. Other factors, such as a rapidly improving US current account position and stabilising economic activity will play a part. From current levels, my dollar bearishness is in greater check today than six months ago when I wrote of a dollar adjustment to come.

?The author is chairman of Intelligence Capital , emeritus professor of Gresham College and member of the UN Commission of Experts on International Financial Reform