OVERNIGHT

Reuters rseported falling energy prices added to investor worries as Asian equities and the Chinese yuan recorded 4.5 year lows in trading Monday as the day of reckoning for the Fed's first interest rate hike in nearly seven years nears.

Trouble in the oil patch continues to contribute to the beggar thy neighbor global central bankers are playing. The People"s Bank of China continued Monday to guide the yuan lower, "setting," as Reuters reported, "a yuan/dollar official midpoint at the weakest since July 2011."

In a related story the WSJhttp://www.wsj.com/articles/dont-be-afraid-of-chinas-currency-gift-basket,investors were told the recent Chinese move to join a basket of currencies this time around appeared to be for real.

Every five years, China promises the world a currency basket, only to remain tethered to the U.S. dollar. Investors should be on guard that this time the basket is for real. Late Friday, in typical Chinese policy maker style, a currency department of the People’s Bank of China released a cryptic, unsigned editorial saying it would begin to publish a reference rate for the yuan against a trade-weighted basket of 13 currencies. The implication is that this new reference rate will be more important than focusing exclusively on the yuan’s rate versus the dollar. The PBOC said the new rate would be of “great significance.”

Just because it is publishing a rate, of course, doesn’t mean it has to follow it. In 2005, when China began to allow a gradual appreciation against the dollar, it said it would follow a basket. It repeated that promise in 2010, when it began to allow appreciation again after pausing during the global financial crisis.

But back then, a basket wasn’t in China’s short-term interests. The dollar was weakening, so even as the yuan appreciated against the U.S. currency, it weakened against its biggest trading partner’s currency at the time, the euro, and against the yen.

 Now is different. Staying tied to an ascending dollar means China has allowed its currency to become very strong against basically the entire world—except for the U.S. And it is at a time when Beijing has struggled to get the economy to respond to stimulus moves.

Following a basket will lead to further depreciation against the dollar. If done slowly and gradually, markets may absorb the change in stride, notwithstanding howls from the U.S. Congress. Yet the chance for dislocation remains high given that companies don’t invest based on a currency basket. Dollar exposure through offshore borrowing is a fact of life for Chinese real-estate companies, airlines and energy firms.

No doubt the timing—just before the U.S. Federal Reserve is this coming week expected to lift interest rates from near-zero levels—is aimed at getting ahead of further dollar strength. But it is not just a calculated, race-to-the-bottom depreciation. Following a basket is arguably a more rational way for China to let its currency adjust to economic circumstances.