IN TOKYO last week the bigwigs of international finance paid close attention to a speech by Ben Bernanke, chairman of America’s Federal Reserve. His speech urged them, in effect, to pay less attention. Many policymakers in emerging markets complain that Fed easing destabilises their economies, contributing to higher inflation and asset prices. Mr Bernanke pointed out that emerging economies can insulate themselves from his decisions by simply decoupling their currencies from the dollar. It is their habit of shadowing America’s currency, however loosely, that obliges emerging economies to ease monetary policy whenever he does.
Policymakers may heed Mr Bernanke’s words—freeing them to ignore his decisions—sooner than he thinks. In a (more thinly attended) speech on the same day, a deputy governor of China’s central bank pointed out that China no longer hoovers up dollar reserves with its past abandon. And according to a new study by Arvind Subramanian and Martin Kessler of the Peterson Institute for International Economics in Washington, DC, the dollar’s influence is waning in the emerging world. Currencies that used to shadow the greenback are no longer following it so closely. Some are floating more freely. But in other cases they are steadily falling under the spell of a different currency: the yuan.
Some inflation-prone emerging economies, such as Ecuador, have adopted the dollar as their official currency. Others, such as Jordan, peg their exchange rate to it. These official policies are one measure of the dollar’s international role. Messrs Subramanian and Kessler use a different measure, based on the way exchange rates behave in the market. They identify currencies that tend to move in sympathy with the dollar in its daily fluctuations against a third currency, such as the Swiss franc. This “co-movement” could reflect market forces, not official policies. It need not be a perfect correlation. It need only be close enough to rule out coincidence.
Based on this measure, the dollar still exerts a significant pull over 31 of the 52 emerging-market currencies in their study. But a number of countries, including India, Malaysia, the Philippines and Russia, appear to have slipped anchor since the financial crisis. Comparing the past two years with the pre-crisis years (from July 2005 to July 2008), they show that the dollar’s influence has declined in 38 cases.

The greenback has in the past played a dominant role in East Asia. But if anything, the region is now on a yuan standard. Seven currencies in the region now follow the yuan, or redback, more closely than the green (see chart). When the dollar moves by 1%, East Asia’s currencies move in the same direction by 0.38% on average. When the yuan moves, they shift by 0.53%.
Of course, the yuan does not yet float freely itself. Since June 2010 it has climbed by about 9% against the dollar, fluctuating within narrow daily bands. Its close relationship with the greenback poses a statistical conundrum for Messrs Subramanian and Kessler. How can they tell if a currency is following in the dollar’s footsteps or the yuan’s, if those two currencies are moving in close step with each other? In previous studies, wherever this ambiguity arose, currencies were assumed to be following the dollar. The authors relax this assumption, arguing that the yuan now moves independently enough to allow them to distinguish its influence. But some of the yuan’s apparent prominence may still be the dollar’s reflected glory.
Outside East Asia, the redback’s influence is still limited. When the dollar moves by 1%, emerging-market currencies move by 0.45% on average. In response to the yuan, they move by only 0.19%. But China’s currency will continue to grow in stature as its economy and trading activity grow in size. Based on these two forces alone, China’s currency should surpass the dollar as a key currency some time around 2035, Mr Subramanian guesses. By that point, the Fed chairman will be the one pulling in the smaller audiences.