Richard Wachman

It is too early to say whether the dollar is permanently losing its status as the world’s leading currency as investors from Beijing to Dubai lose confidence in the faltering American economy. The US has faced economic crises before, but it has always bounced back, stronger, leaner and fitter.

That hasn’t stopped respected commentators from predicting again and again that the end was in sight for the greenback: it happened during the inflationary spiral following the 1973 Arab/Israeli war; it happened in the wake of the 1994 bond crash; and, more recently, it happened following the terrorist attacks on the twin towers.

Is this just one more occasion? For clues, consider a parallel question linked to the future direction of the dollar, which is the more general one about whether American power is on the wane politically and militarily, as well as economically.

History affords the example of Britain to anyone searching for an answer to this prickly question. Sterling fell off a cliff in the years following the First World War, with British power in slow but inexorable decline. And investors were quick to realise it, dumping the pound on currency markets throughout the developed world. Is America at the point where Britain was in 1918? There are striking similarities. The US has been holed below the waterline by an expensive, debilitating war in Iraq, with victory as far away as ever. And just as Britain had to deal with the rise of the US in the first half of the last century, so America is being challenged by the astonishing ascent of China, industrialising at breakneck speed.

Few would argue that the period following the fall of the Berlin Wall, when America was the only real superpower, is coming to an end. China, India and a resurgent Russia will challenge America in the years ahead, and that is why the looming slowdown in the US is focusing people’s minds on the new order.

The emerging economic giants, as well as the immensely wealthy oil-producing states of the Middle East, have embarked on a slow but structural shift out of the dollar into other assets, in the belief that the shine is coming off American power, or — at the very least — that it will have to share it with others who will become just as powerful in the not too distant future. Add in an oil price hovering perilously close to $100 a barrel — prompting fears of renewed inflation — and you have a toxic mix that makes for an extremely uncertain outlook for 2008.

But my guess would be that the current crisis will end where it started — with the investment banks. Their risk-management strategies are in tatters following the credit crunch but, as in previous crises, the banks have shown a remarkable ability to adapt to changed circumstances. It is entirely conceivable that the financial system could emerge in better shape once the lessons have been learnt.

There is too much at stake, however, for everything to be left to the banks and the free market. Regulators and governments around the world need to grasp the nettle and play a much larger role in ensuring global financial stability. But whether that will be enough to restore the dollar to its previous heights is doubtful: the zenith of American power is almost certainly over as China bursts onto the world stage, with unpredictable consequences.