RECENT MONTHS have witnessed a number of shifts in several important market trends. The past few weeks have seen the mighty US bull market lose momentum with sharp falls in some market sectors.

Many of the highly speculative Internet stocks have now declined by well in excess of 50 per cent and at least some of the US stock market's irrational exuberance would seem to be dissipating.

Fortunately, for the rest of the world's stock markets, the bursting of the Internet share price bubble has very limited economic or stock market impact. Most of the cyberspace corporate deals being carried out were based upon one company swapping or issuing shares in return for shares in another company. There were few Internet deals involving cash.

Of course, Internet companies will now find it more expensive to raise cash to fund their expansion plans.

In contrast to the correction on the US stock market the weakening of the US dollar does have wide-ranging economic and stock market implications. As recently as two months ago the euro seemed to be caught in a vicious circle as downward pressure pushed the currency relentlessly towards parity against the dollar.

As the euro weakened, investors who had bought into the strong euro story at the end of 1998 began to withdraw their capital. During the first half of 1999 portfolio capital net outflows from the euro zone amounted to a cumulative €67 billion (£52.77 billion).

The turnaround in the euro's fortunes reflects a growing consensus that the European economy is finally enjoying sustained economic growth. A virtuous circle for the euro now seems to be in prospect as economic growth encourages capital inflows thus further underpinning the currency. The better tone to the European economy and currency should be good for euro zone equities.

However, weakness in the dollar could spell trouble for the US bond and equity markets, thus presenting a danger to world markets. The very strong economic growth of the US economy means that imports from the rest of the world are being sucked into the US at an increasing rate.

This has created a huge deficit on the current account of the US balance of payments. Up to recently this deficit has been willingly funded by capital inflows from the rest of the world. As long as US stocks and bonds were perceived as offering attractive returns, overseas investors were happy to pour billions of dollars into the US financial markets.

The perception that the dollar would remain a strong currency was a crucial ingredient in supporting these inflows.

In recent weeks the dollar has been weak against both the yen and the euro, and it is no coincidence that the US bond and equity markets have also been weak. Policymakers are probably now of the view that the dollar will weaken over the next 12 to 18 months and that this is a necessary adjustment given the size of the US current account deficit.

Their hope must be that this will occur in a gradual pattern and it is likely that the major central banks will act through moral persuasion and possibly intervention in the currency markets to ensure this happens.

The authorities' greatest fear must be that the currency markets will overshoot as they respond to changing market conditions. Currency volatility involving dollar weakness could have very negative consequences for the overvalued US stock market.

Therefore, dollar weakness is a double-edged sword for euro zone equity markets in that better returns could come at the expense of much greater volatility.