Goodbye to the dollar? China leads the way

So it's farewell to the mighty dollar - if the Independent is to be believed. According to correspondent Robert Fisk, the Gulf states are planning - along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold as well as "a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar".

Fisk says secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme which will be put into effect within nine years.

American diplomats are said to be aware of the meetings but not of the details or the proposed time-line. But there are already signs, the paper asserts, of growing tensions between the US and China over Middle Eastern oil reserves that are likely to intensify.

"Bilateral quarrels and clashes are unavoidable," says Sun Bigan, China's former special envoy to the Middle East. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

What else has Fisk unearthed? He says Brazil and India are both interested in collaborating in non-dollar oil payments but China, which imports 60 per cent of its oil, is the most enthusiastic of all the emerging financial superpowers.

But is the move likely? Yes and no. Despite recent predictions of the currency's terminal decline - "The dollar looks awfully like sterling after the First World War," David Bloom, HSBC’s bank's currency chief, told the Daily Telegraph last month - it is still firmly the world's reserve currency. 

Certainly economists are concerned that the shift in global power from West to East is in part behind the recent instability of currency values. For oil exporters to move away from the dollar could protect them from further losses if the US currency continues to depreciate.

Fisk says the driving force behind the discussions is recognition that China and the oil producing nations are no longer prepared to accept America's power to interfere in the international financial system. The impending diminution of American power, he believes, was recently acknowledged by World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said ahead of meetings of the IMF and World Bank in Istanbul.

At the same meeting last week, G7 finance chiefs warned against "disorderly" swings in currencies. "Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," they said in a communique.

Of course, predictions of the dollar's decline are now new. In 2007, former Federal Reserve chairman Alan Greenspan said the euro could replace the US dollar as the world's primary reserve currency.

But with global economic growth expected to resume in developing nations like Brazil, India and China sooner and at a quicker pace that in the US or Europe, it is understandable that emerging economic players should want to re-arrange the financial system established in the Bretton Woods accord at the end of World War II.

"We should not be sentimental for the dollar," says the Independent. "It makes economic sense for world trade to be conducted in a variety of currencies. Relying on one only has the advantage of clarity, but it also creates instability if the economy that underpins it faces uncertain prospects." ·