The era of the almighty but lonely dollar as the world's reserve currency is drawing to its close, and is doing so relatively peacefully, and China's yuan is advancing, cautiously and politely, to its place at the top table of global finance alongside the yen and the euro.

Zhou Xiaochuan, the governor of China's central bank, chose the opportunity of opening the bank's new Shanghai office Wednesday to announce the criteria for valuing the yuan, in accordance with a new currency basket that is heavily weighted to the dollar, euro, yen and South Korea's won, China's main trading partners.

Zhou explained that currencies were chosen for inclusion and weighting in the basket according to their share of China's foreign trade, foreign debt and foreign direct investment.

After the big four of the dollar, yen, euro and won, the next currencies in the basket were Britain's pound sterling, the Singapore dollar, the Malaysian ringgit, the Australian and Canadian dollars, the Russian rouble and the Thai baht.

The new system, said Zhou, is designed "more comprehensively to reflect changes in the yuan's value against major currencies, better handle impacts from an unstable U.S. exchange rate, reduce fluctuations in the yuan exchange rate, and maintain stability of China's foreign trade environment and sustained healthy relatively fast development of the economy."

The precise share of each currency in the total remains a closely guarded secret, but experts at Australia's ANZ Bank estimate that the dollar would almost certainly remain the main currency in the basket, since over half of export contract settlements across the Asian economies are denominated in the U.S. currency, and the modest adjustments in the yuan's value since its revaluation last month have largely reflected shifts in the dollar.

The Australians accordingly estimate that the dollar accounts for at least 40 percent of the Chinese basket, the yen and the euro account for 15-20 percent each, the won for around 10 percent, and the other currencies have token amounts or around 2-3 percent each.

They may be wrong. China's trade with Europe is climbing fast towards the levels of China's trade with the United States, and the euro is looking a great deal more stable than the dollar.

There is a theory in Frankfurt, where the European Central Bank takes its place in the global financial pecking order very seriously, that China's new basket may be closer to a third each for the dollar and euro, and rather less for the yen and won.

Nobody outside the Chinese central bank really knows what the weightings are, and they will doubtless be subject to change, and in any event, the Chinese keep their secrets. But the key strategic fact is that while China has hitherto pegged its currency to the U.S. dollar, it has now gone for a multi-currency basket in which the dollar is no more than first among equals.

In some ways, the dollar has been in that position for a long time. When Richard Nixon finally ended the dollar's link to the gold standard in 1971, and the OPEC price rise and the great inflation in the 1970s gave us the era of floating and unstable currencies, the Deutschmark and the Yen took over the subsidiary role as secondary reserve currencies that the British pound had played in the 1950s and 1960s.

But the fate of the pound sterling underlines the way that the power of a currency is very strongly linked to the strength of its parent economy. By the 1960s, it was plain that sterling could not sustain the prominence it had under the old 1945-era system agreed at the Bretton Woods conference.

And in the 1990s, it became clear that the yen could hardly become the world's second currency when the Japanese economy was in systemic stagnation, a fate which is may only now be escaping, depending on the fate of Prime Minister Junichiro Koizumi's reform plans in the election he has just called.

And while the euro represents the combined weight of a dozen European economies, including Germany, France and Italy, not one of the three has been an impressive performer in recent years. The vigor in the overall economy of the European Union depends on Britain, Spain and the fringe economies like Ireland, Finland and the new members like Poland and Slovakia.

Of the world's big three economies of the U.S., Japan and the EU, only the Americans have demonstrated a consistent ability to grow, to create new jobs, to overcome recessions and to invent and launch whole new industries.

The U.S. no longer accounts for half of the total economic output of planet earth, as it did in 1945, but only about 23 percent. That is a lot, but it no longer represents domination, and so China's decision to downgrade the dollar is rational enough, and probably somewhat overdue.

And since the Chinese central bank has been, along with the counterparts in Japan, the main buyers of U.S. T-bonds and securities over the past two years and have thus helped to finance the massive American trade deficit, the Chinese know better than most just how vulnerable the dollar has become.

Remember that comment from Chairman Zhou of China's central bank, that one of the main motives for the new currency basket valuation was so that China could "better handle impacts from an unstable U.S. exchange rate."

The U.S. is still the 900-pound gorilla of the global economy. In technology and research, in education and innovation, in venture capitalism and in the ability to restructure assets, and above all in the vast and unique size and appetite of its domestic market, the U.S. remains the indispensable nation. But the era of the dollar's lonely dominance is ending.

The new world financial order is emerging that has been looking for some time like DEY, for dollar-euro-yen. Now it seems safe to predict that we had better add the Yuan to make it DEYY, and at some point down the road, we may have to add the Indian rupee to make it DERYY.

Related Links
SpaceDaily
Search SpaceDaily
Subscribe To SpaceDaily Express

Memory Foam Mattress Review

SPACE MEDIA NETWORK PROMOTIONS Solar Energy Solutions Tempur-Pedic Mattress Comparison ... Newsletters :: SpaceDaily :: SpaceWar :: TerraDaily :: Energy Daily XML Feeds :: Space News :: Earth News :: War News :: Solar Energy News