The story of the soaring Canadian dollar is no longer just about shopping in Buffalo or the troubles faced by domestic exporters. It is no longer just about Canada at all.

Rather, the story of the soaring Canadian dollar is now about something far more dramatic and dangerous. It is about the decline of the American dollar as the world's currency of choice. It is about the end of a world financial system that has been in place, in one form or another, since the 1930s and that has given the developed world unprecedented wealth. It is about America's economic chickens coming home to roost. It is about the end of empire.

And for Canada, which has prospered from its privileged position near the heart of this empire, it is potentially very bad news.

At the heart of the problem is a development that Canadians have difficulty getting used to: The American dollar, which we tend to see as a fixed star in the firmament of currencies, is falling. It is falling relative to every major currency – the euro, the Japanese yen, the British pound. It is falling relative to gold. It is falling relative to oil.

The fact that a barrel of oil now costs about 40 per cent more than it did in August is tied in large part to the depreciation of the currency in which its value is measured: The U.S. dollar.

Every successful empire brings with it an imperial currency. In Roman times, the denarius dominated trade in what is now Europe. At the height of the British Empire, the pound sterling was literally as good as gold.

Similarly, when empires wane, so do their currencies. As Rome overextended itself with military adventures, it devalued the denarius. In 1931, depression-torn Britain officially served notice that its empire was on the rocks when it decoupled the pound from gold.

Since then, the U.S. dollar has been the world's currency of choice. Arab princelings demanded dollars for their oil. So did Colombian cocaine dealers.

When China abandoned Maoism, it was dollars that Communist authorities wanted in exchange for the exports they sent abroad.

So it was perhaps appropriate, yesterday, that it fell to Chinese central banker Xu Jian to announce officially what economists have been saying for years: the dollar is "losing its status as a world currency." China, he explained, would no longer keep just American dollars in its reserves but would diversify its holdings to include other major currencies.

Given that China's central bank holds $1.43 trillion worth of U.S. dollars, that was not an insignificant statement.

The reasons for the dollar's decline are familiar. Like the Romans and British before them, the Americans have overextended themselves. As a country, they import more than they export. As individuals, they spend more than they earn.

Up to now, these excesses have been balanced by the rest of the world's willingness to hold dollars. China, for instance, was willing to take dollars in exchange for useful manufactured goods because it believed the U.S. currency would hold its value.

In a sense, it was like a giant pyramid scheme. As long as everyone believed the dollar was strong, it remained strong.

But as soon as a crack appeared, the edifice shuddered.

If the American dollar were just America's dollar, none of this might matter. Indeed, a lower U.S. dollar, by boosting American exports, will help the U.S. get through any downturn sparked by that country's housing and mortgage crises.

But the U.S. dollar is not just America's. It is the world's currency; it provides a platform of stability on which other countries can operate.

French president Nicolas Sarkozy sounded the alarm yesterday in his address to the U.S. Congress. For America to stand by and let its dollar collapse, he said, is to risk a trade war of global dimensions.

What he meant was that Europe would not let the U.S. engage in competitive devaluation without retaliating.

And this is the danger for Canada. As a small trading nation, Canada is sure to be sideswiped in an all-out trade war. As a small trading nation, Canada also depends on a stable international financial system based on a stable international currency.

So forget the minor ups and downs of the loonie. Sure, it matters if the Canadian dollar sits at $1.08 (U.S.) or $0.88. But it matters more if the U.S. dollar itself is under stress. The key development yesterday was not the fact that Canada's dollar closed down slightly from the day before. It was the fact that, relative to the euro, the U.S. dollar hit a record low.