ON OCTOBER 20th, the finance ministers of the G7 will meet in Washington as part of the annual International Monetary Fund get-together. It is already clear that foreign exchange markets will be a key part of their discussions.

Ever since the credit crunch developed in July and August, the dollar has been steadily declining against other major currencies, albeit with a modest recovery in early October. For the euro, a key milestone was passed when its worth exceeded $1.40. That has already provoked Nicolas Sarkozy, the president of France, and Romano Prodi, the Italian prime minister, to worry aloud about the effect on Europe's economy.

But what can the politicians do about it? Interest rates in the euro zone could be cut, but that is in the hands of the European Central Bank (ECB), not the finance ministers. The best Jean-Claude Trichet, president of the ECB, can manage for the moment is to keep rates on hold rather than raise them, as he wanted to just a couple of months ago.

On the other side of the Atlantic, there is zero chance of the Federal Reserve raising rates to support the dollar at the moment, even though the latest non-farm payroll numbers may have reduced the immediate chances of further cuts.

The American and European central banks could intervene to drive the dollar higher, of course, but would that really be effective? Asian central banks are buying dollars every day, but that has done no more than slow the greenback's decline. The final option is to talk the dollar back up but will the Americans be supportive? After all, a declining currency suits them when the domestic economy is weak.

So it would be a surprise if the G7 came up with an agreement on the scale of the Plaza accord of 1985 (intended to drive the dollar down) or the Louvre accord of 1987 (which aimed to push it back up).

But is the current situation sustainable? The dollar has been falling in tandem with the weak American economy, which has led to the perception that the Fed will have to cut rates. But America is dependent on the “kindness of strangers”: foreign investors are needed to fund its current account deficit.

At the moment, they are being offered the prospect of a lower return in a depreciating currency. That doesn't look like a great deal. There are already some signs of strain: the Saudi authorities did not follow September's rate cut, leading to speculation they might abandon the dollar peg, while the Vietnamese have widened the dong's trading range against the greenback.

At some stage, the Fed may be asked to choose between safeguarding the dollar from a complete rout and protecting the economy from recession. It will be interesting to see how it reacts. Most people would assume the dollar would get sacrificed.

Meanwhile, the "carry trade" has not gone away. Australian and New Zealand dollars and the Turkish lira have all been showing signs of strength. This suggests that the risk appetite of investors has not been dented too severely by the credit crunch, the freezing of the money markets, August's volatility in the equity markets and all the rest of it.

Investors may well be assuming that the problems are contained within the American economy and that emerging markets will carry the global economy on their own. That would explain why the MSCI emerging markets equity index is at an all-time high and why emerging market shares now trade at a premium rating to the rest of the word.

But that would also suggest that the exciting investment opportunities are all in Asia and Latin America. In which case why is capital flowing from emerging markets to the developed world, and not the other way round? That may just about have made sense when the American economy looked sound and was still the main locomotive for the world. But that is no longer the case.