The Treasury is likely to look at the whole sterling index - including the dollar - in its assessment of the single currency

Faithful readers will sense that I have become increasingly sceptical about early British membership of the eurozone - but not for any of the common reasons. "Keeping the pound" is a pretty pathetic form of patriotism. Nor is my scepticism due to the mess that the core euro members, above all Germany, are making of their economic policies. The greater the mess, the greater the opportunities for British business. Nor is it even due to fears of an uncompetitive entry rate for sterling, seeing how long the British economy has managed to prosper at a supposedly overvalued rate.

Unlike some opponents of euro membership, I do not see the exchange rate as a policy weapon but as a safety valve. Is the dollar overvalued; and if so by how much? On the official Fed index the dollar is more than 25 per cent higher than it was at the beginning of 1997 but on the arguably more representative ABN-Amro index, which excludes minor US trading partners, it has risen by only about 7 per cent. The virtue of floating rates is that governments do not have to pronounce on the matter.

I am, however, more worried about the impact of the euro on micro policies. There has been much talk of asymmetric shocks as a threat to a wider euro area. The most likely shocks are from divergent policies of member governments. Or, to be more precise, fears of such divergence will prevent members from engaging in worthwhile policy experiments. There are all sorts of reasons why a government may want to pursue policies leading to a once-for-all increase in money costs. Examples are energy or environmental policies that raise the cost of fossil fuels and a payroll tax to finance the National Health Service.

Again, I would not lose any sleep if such policies were determined at a European level. But they will not be in the foreseeable future. We shall just see national governments needlessly put into a straitjacket, deprived of both the safety valve of the exchange rate and the knowledge that common forces are affecting costs throughout the area. Thus my scepticism is based not on dislike of the euro but on a positive preference for a floating exchange rate.

Encouraging the euro to compete with the pound sterling is not just a form of words. It means that, far from being hostile to the euro, the government should do what it can to promote currency competition inside the UK. But there cannot be currency competition between sterling and the euro, or anything else, if the pound disappears.

In the past, I tended to favour euro entry for non-economic reasons. I feared that a rejection of the euro in a referendum would be followed by calls to repudiate the far more important European Court of Human Rights in Strasbourg, which has nothing to do with the European Union and whose Convention is now incorporated into British law. This still worries me. But I now think that the more the euro issue is discussed as a purely monetary issue, the less is the chance of such a reaction.

But whatever my personal opinion, many middle-of-the- roaders will make up their minds on the basis of whether sterling is likely to join the euro at a "competitive" exchange rate. One foreign exchange market view is that the pound would have to fall to a value of £0.65 or £0.66 for entry to be contemplated, equivalent to the old DM3 per pound; and it is within a stone's throw of the three-year forward quotation. It is doubtful whether the existing euro members would contemplate anything much lower. Above all Germany, which gave away a lot of competitive ground when it entered the new currency, would not be disposed to risk losing any more ground to the UK.

But would such a rate be a tolerable one? Treasury advisers will first try to estimate an appropriate range for the pound, not against the euro but on the trade-weighted sterling index, and only then move on to what this might mean in terms of the sterling-euro rate.

The assessment thus depends crucially on what happens to the dollar. If the modest drop in the dollar so far this year were to prove the start of a prolonged fall, the suggested euro entry rate might involve no further effective depreciation at all of the trade-weighted sterling average.

What, then, is the dollar likely to do? There has been much more anti-dollar talk in financial circles than for a long time past. The US payments deficit, the US private sector savings deficit and the inflow of foreign investment into the US are all aspects of the same process. If any one of these changed the others would follow as well. The US payments deficit has shrunk a little in the first few months of 2002; and we can assume that the inflow of overseas capital has dwindled. The dollar drop has been too recent to be the main factor at work.

A lasting shrinkage of the capital inflow would tend to press down on the dollar but an internally generated fall in the payments deficit would tend to push it upwards. The joker in the pack is the level of US domestic activity. The most likely force that would simultaneously both reduce American borrowing from overseas and slash the payments deficit would be a collapse of consumer spending, which has sustained the US economy for so long. In other words, the important variable is not the level of the dollar but the rate of US domestic activity. The US economy has been the main force for buoyancy on the world scene and if the US recovery were to falter, and give way to a double-bottomed recession, many of those in Europe who have been complaining about the over-strong dollar and a weak euro would wish that they had kept quiet.

Paul O'Neill, US Treasury secretary, has come under fire for espousing a "strong dollar policy". It was probably very far from his intentions to try to "jawbone" the dollar upwards. On several occasions in the past few decades the US administration has been suspected of wanting to weaken the dollar to improve the competitiveness of US industry. Given the sensitivity that President George W. Bush has shown to his domestic industrial lobbies over steel and agriculture, the suspicion could have some foundation.

Some economists recommend a Trappist silence on currency matters to avoid such dilemmas. But the only finance minister who has tried has been the British chancellor, Gordon Brown; and even he has not been able to keep supposed "Brownites" in the government to this vow.

If the US Treasury simply wants the dollar to find its own level, it believes it has to talk up the US currency. But no one has any idea where the dollar is going to be by next autumn or spring when Mr Brown has to decide on the euro.