The US dollar enjoyed a period of revival during the worst of the global recession. As the fires of the financial crisis spread, credit was being extinguished even as more dollars were being printed, relieving the system of an excess supply. It also helped that the United States was considered to possess a safe-haven status. Now that the world economy has stabilised and is set for recovery, the greenback is facing renewed difficulties.

Last week, the credit rating agency Standard & Poor's committed a faux pas. It lowered its outlook, regarding the AAA rating on UK debt, to "negative" from "stable". In issuing their outlook, they didn't stop to think that this would draw attention to the biggest debtor of all, the United States.

Traders, already nervous about the precariousness of America's financial position and the trends in monetary and fiscal policy, were quick to draw conclusions. The dollar was hammered and government bonds fell. Sterling, which had initially lost ground against the greenback, reversed course and moved higher. Other major currencies also made gains.

The US fiscal deficit, as a percentage of GDP, is actually projected by the IMF to exceed the ratio for the UK. As the record of the past year shows, few others have been more aggressive with fiscal and monetary policy to fight the recession than US authorities.

One factor, above all, has helped them implement their policies. America has the extraordinary advantage and privilege of possessing the main international reserve currency. But it has abused that privilege, to cover up major policy mistakes and impose costs on others.

As some notable economists have observed, the US has many of the characteristics of bankrupt third world countries. Were it not for its advantages, America would now be in a severe crisis mode desperately seeking a rescue package from the IMF.

Tired of bearing the costs of made-in-America problems, there is now a rising chorus of calls for an alternative to the dollar. Well, we already have one alternative to the greenback, namely the euro. Unfortunately, it does have a few warts, even though compared with the dollar it is beginning to look prettier by the day.

Some people argue that a credible reserve currency must be backed by a country with hegemonic military and political power. If that is true then, with America steadily losing power globally, the fortunes of its currency must also decline.

In a multi-polar world of competing major powers one would expect the development of multiple reserve currencies that would be found attractive internationally. Another much discussed idea is of a reserve currency issued and managed by the IMF on an expanded basis. This sounds theoretically attractive but it would be difficult to achieve consensus and have the scheme implemented in practical terms.

China's renminbi is clearly a major candidate to attain reserve status, but that is probably still several years into the future. Obviously, Chinese authorities have to make it a fully convertible freely-floating currency first. But the policymakers are cautious long-term planners and want to change the overall orientation of the economy before removing the currency peg.

There is a concerted attempt to effect change on three major fronts. First, to shift the proportion of aggregate demand from exports to domestic sources. Second, to diversify the destination of exports away from dependency on the US. And, third, to transform the financial sector towards more sophisticated structures and capabilities.

For the present, despite a lot of nervousness, China isn't going to shoot itself in the foot and stop funding US deficits. The same thing applies to Japan which has been a principal funder of America's spending excesses for a much longer period than China - - going back several decades.

The potential for the yen to serve an expanded role as an international reserve currency is limited. Japan has neither a dynamic economy, nor the political clout that would be necessary for the JPY to attain a higher status.

We can still count Saudi Arabia among major backers of the greenback, with the smaller Arab oil producers lining up behind it. The decision to peg its currency to the dollar, to maintain its dollar assets and to continue defending the pricing of oil in dollars, within Opec, is primarily a political one. What the Americans offer in return is protection of the regime, despite the fact that it is nauseously corrupt, autocratic and has strong links with extremist Islamic organisations.

Taking account of all the above considerations, a collapse of the dollar is not imminent. However, going forward, pressure on the currency is likely to continue and a severe correction cannot be ruled out. Over time, other reserve currencies will gain ground.

Iraj Pouyandeh is a strategist and senior portfolio manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com