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Anti-Dollar Contagion Gains Pace

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Yesterday, China's central bank posted an essay on its website calling for the creation of a new international reserve currency. Given that the Asian power now holds most of its $2 trillion of foreign currency assets in U.S. dollars, the news caused quite a stir on Wall Street and in Washington.

Yet the real story for those who've been paying attention during the past few months is not that the Chinese are suddenly getting worried about their dollar holdings. Rather, it is that so many other nations are also having doubts about the U.S. currency -- and are expressing their concerns publicly.

Last week, for example, Russia issued a statement urging the International Monetary Fund to consider creating a "supranational reserve currency to be issued by international institutions as part of a reform of the global financial system," according to The Moscow Times.

Reuters also reported remarks by Chalongphob Sussangkarn, a former Thai finance minister and now president of the Thailand Development Research Institute, where he raised concerns about a possible large sell-off in the dollar.

"The U.S. deficit is so huge," Sussangkarn said. "This is why all countries, particularly East Asia, are concerned because we hold a lot of these assets. What happens if the U.S. dollar falls 40 percent? Many central bankers will be losing huge amounts of money."

But that's not the end of it. During a speech two weeks ago at a one-day summit of the Economic Cooperation Organization, which includes Iran, Turkey, and other nations nearby, Iranian President Mahmoud Ahmadinejad said that the "capitalist system was close to collapse," according to Reuters, and he suggested that a single currency -- other than the dollar -- should be used in cross-border trade between members.

A day earlier, The Japan Times detailed a report by the Institute for International Policy Studies, a semigovernmental think tank, which asserted that "in order for the entire Asian region to keep growing, [Japan] must create the third-polar regime in Asia by introducing the Asian common currency, which stands on par with the U.S. dollar and the euro."

And finally, while the Gulf Cooperation Council today announced that it was postponing a 2010 deadline for the launch of a common currency for the region, which includes Arab states whose domestic units of account have long been linked to the dollar, the group indicated that it remained committed to a strategy that would eventually loosen those ties.

As was the case with the now hobbled U.S. banking system, the dollar's fortunes have long depended on the confidence of others.

If that weren't true, nations such as China, Japan, and Russia, which own $740 billion, $635 billion, and $120 billion, respectively, of U.S. Treasuries, would have few economic incentives to be so heavily invested in a market where returns are low and the currency has steadily depreciated over the course of many decades.

Others' faith in our future also helps explain why nearly two-thirds of all dollars that are currently in circulation are in the hands of foreigners -- that is, "unnatural" holders who usually don't spend their money here.

Under the circumstances, what now seems to be a contagious quest for alternatives to the dollar -- a budding run on the bank, if you will -- by policymakers in China, as well as in many other countries around the world, should not be taken lightly.