These are nervous times in the market. The British public, preoccupied until now with watching the Northern Rock saga unfold as if it was a contained and isolated event, are beginning to realise that something is up.

The oil price, which bounces around with gay abandon just below the $100 marker, is one aspect of the case. Another is the weakness of the dollar. Some fear that the two separate but related phenomena might converge.

The weakness of the dollar is already in danger of having a potentially very serious effect on US geo-political hegemony. When the dollar looks weak, America looks weaker. The US can cope with this.

The greater danger is of a lack of confidence in the dollar becoming a rout. Revaluation and a flight from dollar assets is now on the cards even if the major players like OPEC (outside its radical element of course) and China are fighting hard to sustain the current system.

The Economist, the very model of modern Atlanticist liberal thinking, comes out for OPEC to bite the bullet and shift to a basket of currencies in which the dollar predominates.

The reasoning, presumably, is that a safe and managed transition, not without its own risks, towards a recognition that the world economy is more than just the North American market might forestall a collapse, with unknown and possibly catastrophic consequences.

Part of the bind that policymakers are in is reflected in indications from the Federal Reserve that US inflationary pressures start when the US economy hits 2.5% growth rates. 

This is a lower level than is comfortable. It helps to explain Fed resistance to the rate cuts that are regarded as so necessary by many of those in the capital markets under increasing pressure because of the credit crisis.

Latest estimates (Goldman Sachs) suggest that the global credit squeeze is likely to go on to the end of 2008 with a further $48bn of write-downs to come. This is coincidently just about the amount of UK taxpayer money the Chancellor has used to prop up Northern Rock.

Global shares, including FTSE, fell sharply earlier this week on these new estimates and on other news. All the market gains made in London in 2007 were lost in the fall on 19 November and prices continued to slide worldwide. 

There also seems to be a sharp shift into US Government bonds as a ‘safe haven’. This suggests that, despite current difficulties, the US will long retain its hegemonic role within the global economic system even if its relative power is beginning to decline. We will come back to that thought when we come to the 'good news'.

If there is talk of 'decoupling', it is probably more in hope than it is of expectation. 'Decoupling' means that the rest of the world has managed to decouple itself from the US economy but there is a line over which the reality of coupling starts to show - in a devastating way to some countries.

China is now primarily an export economy directed at the West. China is openly expressing concern at the weakness of the dollar because it is wiping out the value of its reserves by the day. Iranian and Venezuelan complaints that the 'real' oil price is much lower - in the mid-60s - are equally reasonable.

Premier Wen Jiabao has said that his country's $1,430bn of dollar reserves are becoming very hard to manage. Wen Jiabao is not alone in intervening to try to guide sentiment. Commentators noted that world leaders were developing a pattern of verbal interventions to try and talk up the dollar or at least stop the market talking it down.

OPEC's disquiet on exchange rates also unnerved markets at the beginning of the week. No-one believes that Iran and Venezuela will control OPEC policy but important pro-Western states like the UAE are getting very worried about the inflationary effects of dollar weakness on their populations.

A decision on OPEC's attitude to the dollar has now been shunted into a Committee of OPEC Finance Ministers. This may have stopped a damaging debate in Riyadh but it also created precisely the sort of uncertainty that unnerves the market. Iran and Venezuela will get another platform for their partly politically-inspired campaign against the dollar early next month.

However, these matters must be put into proportion. This is still a process of correction rather than the preliminary to a recession or worse. The system needs the lee-way to adjust and it fears only that sentiment will cause panic. Much Government activity is about soothing nerves and keeping the talk going - in effect, buying time to let the system adjust at its own pace.

The Financial Times argued this week that the Euro was in no way close to displacing the Dollar as a reserve currency. The long term economic prospects for the US as a major developed market with a strong record on innovation still remain better than those of Europe.

Federal Reserve forecasts imply that the correction in the US will play out during 2008 and the economy will strengthen again as the year progresses. At this stage, we do not consider this to be just talk to soothe markets.

But Gulf investors are looking to increase their exposure to the Euro. The ‘basket’ approach (as the Economist suggests) remains on the cards if it can be turned into a sensible anti-inflationary rebalancing of their reserves away from a dollar of which far too much has been asked.

Arab funds may also pick up distressed US assets. There is another debate here that muddies the waters - the negative Western, and particularly US, attitude towards sovereign wealth funds. This is a political hot potato that provides a rare opportunity in the West for the sort of irritating national populism that the market loathes.

Any Arab ‘incursions’ will be taking place in an election year so we can expect some fireworks. All this is telling us is that the US election itself, in a volatile international situation, may be part of the problem, affecting oil and currency bets alike.

So where are we heading? Well, we do not underestimate the risks at all. We see a very uncertain and rocky eighteen months. On the other hand, much of the turmoil is still a matter of correction and the US election process does not go on forever (even if it sometimes feels like it). 

In November a mandate will be given to a new US President. US allies will be falling over each other to assist a more multilateral and perhaps chastened America to take on its 'natural' leadership position. 

The US also has an opportunity to reinvent its policy platform. Under a new mandate, it can operate more effectively within the constraints set by a more complex global economy - and take account of the emergence of a 'resistance bloc'.

Although insurgency and the 'resistance' are not going to be easily defeated (indeed, we think such a bloc is here to stay in some form), balance will be restored. Recovery in US economic power may not be complete but it is likely to be certain even if the longer term prognosis is less rosy. 

So we are optimists with a few caveats. If the current Administration makes all its political bets on a last-minute 'decisive' move against the 'resistance bloc' (and, of course, we are talking about a strike against Iran) or panic sets in amongst those holding massive dollar reserves or the effect of the credit crisis on the Western economy is much worse than currently predicted, then we are into another ball game altogether. 

So watch the markets but don't panic - the betting is that, subject to the wisdom of our elites (oh dear!), what does not kill you will strengthen you. Good business practice and common sense should see you through to a more prosperous 2009.

www.pendrywhite.com