The U.S. dollar has been receiving a very bad rap. Over the last few months, it has lost ground to a basket of major world currencies. In the last two weeks alone, the Euro tossed at few more punches at the sickly greenback and the Canadian dollar, which some American publications once referred to as the “northern peso,” floored the dollar.

For the first time in 31 years, the Canadian dollar overtook the now not-so-almighty greenback on Sept. 21 to trade at $1.01 (this obviously has been fluctuating).

The Euro, eating away at the dollar since early summer peaked on Sept. 25 when the dollar fell to $1.41 per Euro. London is obviously an expensive city for U.S. dollar holding spenders due to the sterling pound’s relative strength.

What does all this mean to the world economy? It is true that the U.S. economy, the world’s largest, is intimately tied to a well-functioning world economy. The saying that when the U.S. coughs the world catches a cold is, well, true. However, the dynamics have been shifting and this may not be entirely true. A vibrant Chinese economy, an ambitious Euro area and a resurgent Japan are all giving the dollar a hell of a nightmare.

The precedent is probably an international financial system flush with excessive liquidity: Ravenous hedge fund and private equity moneybags have been chasing investments all over the world; China, flush with cash has been mopping up natural resources all over the world while underwriting Americans’ insatiable fetish with credit.

As a result, (for better or worse) lenders have also been very easy-going with their money. Coming in for drabbing especially, are U.S. mortgage lenders who have been (rightly or wrongly) accused of throwing money at sub-prime borrowers with squeaky creditworthiness.

Enter the now over-flogged “sub-prime sector.” The borrowers defaulted and the well-oiled finance machine started losing momentum. Normally, this is not good; the international finance system is designed to run smoothly. Otherwise, international trade and investment would be disrupted, markets would crash and recessions would be unavoidable. This is not tenable; at least the world does not want to relapse into the bad old days of early 20th century depressions.

As if to show the world that it still rules the roost, the instability of the dollar reverberated (and continues to) across the world. The effects have been profound: A British bank almost went belly up when depositors beat its doors asking for their money. Very surprising given that the last time such a thing happened in Britain was in 1866! Across the channel, the Federal Reserve Bank cut interests rates to release more money into the market and ease the squeeze.

In the middle east, Saudi Arabia, which for 21 years has pegged its currency to the dollar gave the Fed’s action in D.C. a pass. Pundits fear that central banks and other big investors across the world may bolt from the dollar. Insignificant as it may seem in the international system, Sudan has threatened to dump the dollar for the Euro.

The worsening health of the dollar has the potential to exacerbate inflationary pressure in the U.S.. Europeans are however worried that if the Euro continues its rise against the dollar, the region’s growth will be undercut by making its exports less desirable due to cost. Obviously, the rest of the world will stand up and take note of all the state of affairs as the world is all connected.

Even as this unfolded, China was moving forward with its phenomenal economic growth. In fact, as the U.S. dollar was seeing red, the Chinese central bank was raising interest rates to mop up liquidity in an economy gushing with yuan.

Is the dollar then, on its last throes? Hardly. Is it on the way to a sick bed? Potentially. The time when the U.S. economy was king of the world seems to be slowly slipping by. According to the current issue of The Economist, China is now contributing more to global GDP growth than the U.S.

The unbridled thirst for natural resources by the bristling economic panda is keeping commodity prices high. This is a boon to countries like Canada and many other countries all over the world which, with “underground” economies (minerals and oil) will continue to keep China running, and hopefully the rest of the world too.

Whether this is a reason to worry about the international system is up to the economists to determine. However, I would think that it is a good thing that world economic might is tending to be a more diversified multi-polarity. This probably makes for soft landings when the going gets tough for the U.S. dollar. In any case, the entire world does not have to catch a cold just because the U.S sneezed, a sniffle maybe, not a heavy cold.gnews.com.