Early last week some of the most stable British companies lost as much as $100 billion within hours in what appeared to be a mini market crash. As the stocks were steadying over the next 24 hours market watchers were heard voicing suspicion of manipulation by the big companies for profit taking.

And sure enough the Financial Services Authority (FSA) one of the three ( the other two being the Bank of England and the Treasury) which together regulate equity and financial markets in the UK issued a warning that it would take regulatory action against traders found to be rumour-mongering for profit.

The mini crash preceded scare stories about the UK’s banks.The Bank of England was itself forced to deny these rumours and that any bank had come to it for funding.

Sally Dewar, the FSA’s managing director for wholesale and institutional markets, said: “There has been a series of completely unfounded rumours about UK financial institutions in the London market over the past few days, sometimes accompanied by short-selling. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them.

“We remind market participants of the need to take extra care, in this market climate, to adhere to the market code of conduct.”

Nevertheless the world –wide financial turmoil seems to have shaken the markets so much so that even legitimate investment money seems to have ceased to flow.

The world it seems is facing a situation in which the risks to economic growth are becoming more serious. The OECD is already thinking of lowering its forecasts for the European and US economies.

A vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand is threatening the developed economies giving rise to the danger that banks would try to dry up on borrowers by charging higher interest rates that will, in turn, force defaults and cause the banks to suffer further losses.

Some even have started predicting that sub-prime debacle would soon turn into a debacle of the primary sources of credit, that is the banks and that is the reason why Bears Stearn found it self in such a dire situation that its share price plummeted from $175 a piece to $2 at which price JP Morgan bought BS with its debt worth a whole $200 billion nationalised by the Federal Reserve. This follows the nationalisation of Northern Rock, a mortgage bank in the UK.

Now banks appear to be restricting credit to each other and to non-bank financial institutions, which is leading to deleveraging within the financial system. This is said to be upsetting banks’ balance sheets and threatening to start runs on these banks to be followed by nationalisation of about-to-fall institutions by respective governments.

Fears are also spreading that European and Asian banks might not be immune, particularly if the recent falls in the market value of high-quality US mortgage debt continue. They bought much more of this debt than sub-prime mortgage assets.

The developed economies are also facing at this financially inopportune times rising inflation, pushed upwards by high oil, food and commodity prices. Price pressures – with headline rates at four per cent in the US, 3.3 per cent in the eurozone and 2.5 per cent in the UK – are said to limit the scope for central bankers to throw money at the global slowdown for fear of re-igniting an inflation problem.

Mervyn King, the governor of the Bank of England, last month predicted a genuine reduction in the standard of living in the UK because of the higher energy and food prices. He urged the consumers to accept this reality and warned them not to demand higher wages to offset the price pressures “,because all that will do is lead to another round of higher prices”.

With oil breaking the $110 a barrel barrier, gold shooting up to $1000 an ounce and dollar on what appears to be an unstoppable slide, and all the three showing no signs of any slow down in their steep march to signal the beginning of the end of the dollar era.

According to experts, dollar could slide on average to $1.60 against the euro, $2.05 against sterling and 98 yen in the second quarter, with a strong possibility of falls well beyond these levels in the next month or two. Indeed, based simply on interest rate forecasts and the past relationships between rate differentials and currencies, experts justify figures such as $1.75 against euro.

The weakness of dollar is certainly not welcome news to many countries that either peg or informally link their currencies to America’s.

Many are facing inflationary pressures from higher commodity prices and accordingly do not want to cut interest rates in line with the Fed.

But the alternative is revaluation—a process that could prove dangerous for those who had borrowed in dollar terms, since the cost of repaying their debts would immediately rise. Nevertheless, there is persistent talk that Gulf countries would like to abandon the peg, although they are looking at Saudi Arabia, which so far has resisted the temptation for obvious reasons.

Meanwhile, the chief economist of Mitsubishi UFJ Securities Co has been quoted saying by the media here that the sub-prime loan crisis might one day be regarded as the beginning of the end of the era in which dollar reigned supreme as the world’s key currency.

”The ongoing depreciation of dollar illustrates that the international community has begun seeking a new world order,” he said. “People in the future will look back at the sub-prime shock as the cause of the end of the strong dollar-based currency regime.”

The chief economist was speaking at a forum titled, “The Tottering Dollar and the Future of the Yen,”

The oil price hike, in the meanwhile, is seen to have reached its limits according to Capital Economics Ltd. a UK-based research organisation which believes that speculative pressure can only push oil prices so far before fundamental demand and supply conditions reassert themselves, leading to a potentially sharp correction.

“We expect (Brent) crude oil prices to fall to around $85 per barrel by the end of the year,” the CEL said.

Recent demand and inventories data are said to confirm the view that regardless of what rising prices might suggest, consumption of oil and refined products is weakening.

With the world’s largest oil consumer (the US) now in recession, the suggestion does not look all that off the mark.