Global economic tensions hit new levels last week with the latest data from the US and Japan showing a hardening deflationary trend. The phenomenon of falling prices - not so long ago an issue only considered in textbooks of economic history - is spreading from east Asia, with leading western economies apparently slipping into a pattern of falling prices, profits and prospects. As dark clouds gather over the international economy, there was widespread expectation that this weekend's meeting in France of the Group of Seven finance ministers from leading industrial nations would seek co-ordinated action to ease tensions in foreign exchange markets. The causes of global deflation are the subject of much debate. Some blame the emergence of super low-cost producers such as China producing too much. Others, more credibly, point to the unwinding effects of the 1990s stock market bubble which fed huge over-investment in sectors such as information technology and telecommunications. All agree, however, that violent foreign exchange movements, as seen with the US dollar's dramatic weakening in recent weeks, pose serious risks for fragile economies. Incoming US Treasury Secretary John Snow has spooked markets with comments suggesting the long held 'strong dollar'' policy has been put on hold in a bid to boost the country's struggling exporters. Europe, in particular, fears a rapid loss of competitiveness and, more worryingly, a dose of imported deflation as cheap imports harden expectations of future price falls. US Federal Reserve chairman Alan Greenspan's recent musing for the first time on the 'D' word has forced economists to consider the prospect that persistently falling prices may not merely be the result of Japanese-style policy blunders, but a deeper global trend largely immune from counter-measures. Yet, if we are at a critical juncture of the business cycle, there was little evidence of co-ordinated action. Ministers avoided questions of currency movements and Mr Snow, in particular, did not clarify his position on the dollar. Commitments to structural reform and market liberalisation were predictably trotted out. In the absence of strong US leadership, the result was a fudged communique sure to fuel further exchange rate volatility. Such an outcome is disappointing. With world interest rates near 50-year lows, policy makers may have little ammunition in their arsenal of economic tools, however much the moment calls for economic leadership. Any suggestion we are moving towards an era of beggar-thy-neighbour economics with growth-challenged economies seeking advantage through currency weakness can only damage short-term growth prospects and the bigger project of globalisation and trade liberalisation. The 1990s saw the US rise to undisputed economic leadership, being the dominant consumer market and investment destination of choice. Productivity trends suggest its prospects are only temporarily dimmed, and a dash for growth through deliberate weakening of the dollar is unnecessary, while damaging the country's wider prospects. More than ever, the world needs US economic leadership and, if markets dictate, an orderly weakening of the once mighty dollar.