Officially, it's now two out of three regions.

Japan, the world's second largest economy, has officially fallen into a recession (pdf). Japan's gross domestic product contracted 0.4% in Q3 after declining 3.7% in Q2, the office said.

The contraction means that two of the world's three major economies, Japan and the Europe's euro zone, are now in recession. Last week, the 15-nation euro zone reported a 0.2% contraction for Q3 following a similar decline for Q2.

Economist David H. Wang told BloggingStocks Monday Japan has fared relatively well compared to the United States and Europe at the outset of the global financial crisis as Japan's banks have less exposure to toxic assets. However, that does not mean that Japan will not be affected by slowing U.S. demand for consumer goods, some of which are Japanese exports.

"Japan is now seeing the indirect effect of the financial crisis, an export sales slowdown," Wang said. "While the U.S. situation is serious, Japan's is not pretty either. Japan is more export-dependent than the U.S. and its aging population means domestic demand will remain weak. As a result, Japan's recession could be as long or longer than the U.S.'s recession."

Is the dollar's status as the world's reserve currency coming to an end?

It could be, if present trends driven by corrective measures taken to stem the global financial crisis continue, in the view of one monetary official.

European Central Bank council member Ewald Nowotny believes a 'tri-polar' global reserve currency system is developing among Asia, Europe and the United States.

"What I see is a system where we have more centers of gravity," Nowotny said Monday in an interview with Austrian state broadcaster ORF-TV, Bloomberg News reported Monday. "I see for the future a tri-polar development, and I don't think that there will be fixed exchange rates between these poles."

The dollar has served as the world's reserve currency for more than 30 years. A reserve currency is one which financial institutions -- and nations, for that matter -- seek to own during times of financial crisis, stress, or uncertainty. The reserve currency attracts investors in a phenomenon called a 'flight to safety.'

The euro, the currency of the euro zone, this decade has challenged the dollar's reserve currency status, following its introduction into global financial markets in 1999. (Physical euro banknotes and coins began to circulate on January 1, 2002.) A series of U.S. fiscal policy and trade policy errors, among other factors, has caused the dollar to weaken against the euro from about 82 cents per euro in 2001 to the present $1.3317 per euro.

Gosh. Golly. Gee Whiz.

That was the reaction Monday of traders and economists to the European Union's coordinated decision to invest a staggering $2.4 trillion in interbank loan guarantees and bank recapitalizations, ft.com reported, to end the global financial crisis.

(Of course, 'gosh, golly' etc. were not exactly the reactions of traders and economists -- this is a family-appropriate financial blog -- but you get the point.)

Europe's decision sparked a global rally in stocks. The Dow closed up 936.42 points -- the largest one-day point gain in its history -- to 9,387.61.

Europe takes the lead

At minimum, Europe is saying that its economic stake in the current global financial system is so large that it's willing to err on the side of over-committing public funds, economist Peter Dawson said.

"Europe's response is very large, unexpected, and it could prove to be the pivotal move in this crisis," Dawson said. "Europe appears to be saying, 'well the United States is doing what it can do, given its political constraints' now let's do what our political culture allows. Basically, Europe is saying 'the storm of fear starts to lose its strength here.' "

The measures were both sweeping and unprecedented in size and scope, Dawson said. Germany said it offered about $680 billion in loan guarantees and will invest $108 billion in its banking system, ft.com reported. France said it would provide up to $435 billion in loan guarantees and invest as much as $52 billion. The United Kingdom has committed about $70 billion for investment in key banks, along with a guarantee for banks deposits and interbank lending. The Netherlands, Spain, and other nations announced similar plans.

One of the world's leading investors is expressing cautious optimism - - underscoring cautious - - regarding the fate of the global financial system.

Billionaire investor George Soros said Monday a pledge by European leaders to guarantee new bank financing is "a positive step" may help stabilize global financial markets, Bloomberg News reported.

Soros: We're finally getting the leadership we need

"In the last 72 hours, I think the European governments got religion and realized that this is a serious problem,'' Soros said at a press conference in Washington, Bloomberg News reported. "People are looking for some leadership and finally they are getting it." Soros is chairman of the $20 billion Fund Management LLC.

Along with actions by the major central banks to increase the supply of dollars in the global money supply, Europe's major industrialized nations announced fiscal policies to back bank-to-bank loans and recapitalize banks, The New York Times reported Monday. Britain said it will invest $73 billion in its banks, Germany is investing up to 500 billion euros or about $680 billion, and France will create an agency to offer state guarantees for banks and to channel money to them.

Further, Soros underscored that the United States government must recapitalize solvent banks, ft.com reported Monday. The U.S. said it intends to do that, but has not yet released details of its plan. Soros would like the U.S. government's recapitalization to take the form of preferred shares, which would dilute existing shareholders, but with private capital given the right to subscribe on the same terms, if private investors are able to put up more money, ft.com reported.

Twenty five trillion dollars in global market capitalization wiped out. At least $500 billion -- and most likely in excess of $1 trillion added to the United States' national debt. The Fed has loaned money to corporations, added massive liquidity to banks, cut interest, and the U.S. Treasury may invest directly in private banks, if it doesn't nationalize them.

And the currency of the nation primarily responsible for the global financial crisis -- the dollar -- how has it fared?

The dollar has been firm, for the most part, even rising against the euro and British pound. However, the dollar has fallen against Japan's yen. As of Friday at 2:35 p.m. EDT, the dollar had risen 2 cents versus the euro to $1.3382 and 1.5 cents versus the pound to $1.6947, but had fallen one-half yen to 99.33.

The resources of the central bank of the world's second strongest economy have now been marshaled to address the global financial crisis.

The European Central Bank, led by President Jean-Claude Trichet has shifted policy - - a remarkable, historic change - - and is now working in coordination with its companion major central banks - - the U.S. Federal Reserve, Bank of England, Bank of Japan, and the Bank of China - - and others, to end a credit crisis that threatens to cripple international business and seriously damage economies, worldwide.

A legendary inflation hawk,Trichet, whose ECB lowered its key, short-term interest rate by 50 basis points in conjunction with the other major central banks on Wednesday, declined to rule out further steps to solve the crisis, including additional interest rate cuts, Bloomberg News reported Thursday.

ECB: banks offered unlimited cash at 3.75%

Further, and equally significant, Trichet offered banks unlimited cash at 3.75% to help them cope with tight credit markets, Reuters reported Thursday. Previously, the ECB had offered funds to the highest bidders, a tactic that pushed average rates as high as 4.99% - - almost 75 basis points above the official rate.

In addition, the ECB cut in half the premium it charges for overnight emergency loans and increased the interest rate it pays on deposits, Reuters reported Thursday.

A problem that originated in the New World is re-exposing some long-standing nuanced opinions in the Old World.

France and Germany disagreed over how to prevent the global credit crunch from further hurting European banks. Germany, Europe's largest economy, does not want to set up a bailout / rescue fund that France is seeking. Luxembourg Prime Minister Jean-Claude Junker said the fund, which France argued should be as large as 300 billion euros or about $415 billion, isn't needed.

Economist Richard Felson said the United Kingdom also is against the idea, with Britain arguing that an ad hoc intervention policy would be sufficient for now. "A lot will depend on how the U.S. rescue package, provide it passes the U.S. House, performs in lowering overnight interest rates and restoring confidence," Felson said. "There's the sense in the U.K. that while the crisis extends beyond America's borders, the bulk of the bad-asset fallout will still be U.S.-based."

The U.S. Senate passed a revised rescue package, 74-25, Wednesday night and the U.S. House is expected to vote on the measure as soon as Friday.

However, the measure had little impact on overnight interest rates, at least initially. The London Interbank Overnight Rate, or LIBOR, rose for a fourth day, up 6 basis points to 4.21% Wednesday night, as banks continued to hoard cash.

These days, the U.S. Federal Reserve is not getting a great deal of help from its companion major central banks regarding monetary policy stimulus to pull the global economy out of is pronounced slowdown.

In the case of the Bank of England, it kept interest rates the same despite anemic GDP growth. In the case of the European Central Bank, it kept it's key rate at a seven-year high.

Economist: Two terrible decisions

Today, the BOE kept its benchmark interest rate at 5%, the ECB did the same at 4.25%, and London-based economist Mark Chandler is happy with neither.

"Just two terrible decisions stemming from flawed reasoning. Just dreadful," Chandler said. "The BOE and ECB are putting too much responsibility on the Fed to stimulate demand when we need all three central bank engines pulling at once to get out of this economic rut."

The comeback of the beleaguered dollar continues.

The dollar strengthened to a six-month high versus the euro Tuesday, and also rose against the world's other major currencies on a growing consensus in foreign exchange circles that global economic fundamentals are shifting in favor of the greenback.

The dollar strengthened about 1.5 cents to $1.4465 versus the euro, and about 1.4 cents to $1.7877 versus the British pound Tuesday at mid-day. The buck also gained one-half yen to 108.62 versus Japan's yen.

Pivotal for dollar: Europe, Asia GDP

Further, although Tuesday's dollar catalyst was the realization that Hurricane Gustav would cause considerably less-than-forecast damage to Southeast U.S. oil production and the refinery infrastructure, trader Andrew Resnick told BloggingStocks the longer-term focus remains regional GDP growth.

"With Hurricane Gustav out of the way, sentiment's building that this dollar rally has legs. European growth has slowed to recession levels, and China's economy has slowed as well. For Europe, lower interest rates are likely to follow, and that's dollar bullish," Resnick said. Resnick added that he expects the Bank of England to cut its benchmark interest rate by a quarter-point to 4.75% when it meets September 4. He doesn't expect the European Central Bank to lower its 4.25% refinance rate on September 4, but that stand-pat policy may change to accommodation, later this fall.

There are lines of reasoning, and then there are lines of reasoning.

European Central Bank board member Axel Weber said Wednesday there's no plan for interest rate cuts and policy makers may, in fact, have to raise rates as the economy accelerates out its slump, Bloomberg News reported. He added that "monetary policy is where it should be" and that "discussion about declining rates in Europe is premature."

Weber's comments occur after Eurostat reported that Europe's economy contracted 0.2% in the second quarter (pdf), amid signs of slowing in business investment and consumer spending, and sagging business confidence.

London-based economist Mark Chandler told BloggingStocks Wednesday that data he's reviewed indicate Europe's economy will continue to slow in Q3, which is why he's somewhat taken aback by Weber's comments.

"Weber's comments are a bit troubling. I mean, what data is he looking at? The comments will create a bit of a row [dispute] in the U.K. because our economy is not going to contribute to the recovery he sees, not at this stage," Chandler said.

Some market signals are well-known and easily understood. Others are arcane and more-complex, but just as telling.

There's mounting evidence that the "carry trade" is ending, or that at least institutional investors are decreasing their use of it as an investment tactic.

In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) and buy assets in a country where returns are higher. The investment can take many forms, including stocks, bonds, funds, or even the higher-interest currency itself.

Carry trade: A growth confidence indicator

Now, investors/readers may legitimately ask, Why is it important to know what's happening to the carry trade?

Economist Peter Dawson told BloggingStocks that it's important to monitor carry trade flows and data because it's one indicator of investor confidence in a market's ability to produce a return on equity, and by extension, in its economy to grow.

In other words, the carry trade abounds when investors are confident; it wanes when they're not, he said.

One way investors/readers could characterize the current environment is as a world filled with concerns.

Concern about the U.S. housing sector. Concern about declining U.S. disposable income. Concerning about slowing GDP growth in Europe and Asia. Concern about the Yankees not winning the American League pennant.

O.K., that last item was a purely subjective, parochial one, but you get the point: there's concern that global economic conditions are worsening, not improving.

Europe's GDP is latest focal point

Further, while emerging markets in Asia, led by China and India, have been the growth story of the decade, the region really sending a chill up economists' -- business executives' -- spines is Europe, so says economist Glen Langan.

"Up through July we had seen weakness in Italy, Greece, Spain, and Portugal, and the investment community's response was one of 'no big deal, they are not the major growth regions, anyway,'" Langan said. "But now there's signs of slowing in Germany, France, and the United Kingdom, and nearly every demand-side indicator is in retreat. It's a pronounced psychological shift, no question."

The dollar Friday was on course to record its fifth consecutive weekly gain, propelled higher by the prospect that economies in Europe may be later in the recession/expansion economic cycle than the United States.

The above suggests the Bank of England and the European Central Bank will have to cut interest rates -- itself a bullish factor for the dollar -- with the U.S. economy recovering sooner than the economies in the United Kingdom and euro-zone -- another dollar-bullish circumstance.

On Friday, the dollar strengthened 1.5 cents to $1.4675 versus the euro, and about seven-tenths of a cent to $1.8632 versus the British pound. The dollar also rose about 1 yen to 110.61 versus Japan's yen and about one-half cent to $1.0988 versus the Swiss franc.

From dollar-bear to dollar-skeptic

Currency Trader Andrew Resnick said he's not a dollar bull yet, but the changing global economic landscape has moved him from the dollar-bear category to "the dollar-skeptic category."

"Clearly, fundamentals are shifting in favor of the dollar. Global growth is slowing, taking pressure off commodity prices. Export gains are lowering the U.S. trade deficit, and there's now a better than 60% chance Europe [including the U.K.] will have to cut interest rates," Resnick said. "Those are the best fundamentals for the dollar in about three years." Resnick added that he's presently flat, or had no open currency trading positions.

Europe's economy contracted in Q2 for the first time since the euro was launched more than 10 years ago, as exports underperformed and energy costs cut into consumers' disposable income, Eurostat, the European Union's statistics office announced (PDF) Thursday.

Euro-zone Q2 GDP fell 0.2% and EU27 Q2 GDP -- which includes nations in the European Union but not formally a part of the euro currency system -- fell 0.1%, Eurostat said. In Q1, Euro-zone GDP rose 0.7%.

Further, on a year-over-year basis, euro-zone GDP increased 1.5%, with inflation running at about 4.0%, well above the European Central Bank's 2.0% annual limit.

Economist: 'Bad news for global economy'

Economist David H. Wang told BloggingStocks Thursday Europe's slowing economy "is bad news for the global economy."

"This is bad news because we need European growth to prevent a global economic slowing. But the economies in two major European economies are clearly slowing. Germany's GDP fell 0.5% in the first quarter, and France's fell 0.3% in the second quarter, so given their make-up in the euro-zone, Europe has experienced a pronounced slowing," Wang said.

Confidence in the global economy rose in August as oil prices retreated, a new survey of business professionals indicated. The Bloomberg Professional Global Confidence Index climbed to 14.1 in August from 10.3 in July. The July reading was the lowest since the survey began in November 2007. Readings below 50 indicate negative sentiment.

Economist Glen Langan, who did not participate in the Bloomberg survey of about 3,000 Bloomberg Terminal users, said investors / traders "should not attach too much positive sentiment to results."

"First, the survey was at an all-time low in July. Second, we have seen a $30 drop in oil prices, so I would sense that there would be some relief expressed in surveys of financial professionals, executives, and the like," Langan said. "Economic conditions, particularly in the U.S., are sluggish to poor, and the survey generally reflects that."

Oil traded up 80 cents to $113.81 early Wednesday, but has dropped about $34 since hitting a record high of $147.27 on July 11, 2008.

Focus on U.K., E.U.

Langan said the focal point for economists is now the United Kingdom and the European Union. For example, in his projections, Langan has already discounted that the U.S. economy will remain sluggish through at least Q2 2009, but he still sees 1.5-1.9% GDP growth in the United Kingdom, and 2.0% GDP growth in the E.U. for 2009.