The dollar use to be the world's premier currency. OPEC decided to price oil in dollars. The Russian black market under communist rule used dollars. Everybody preferred to have their transaction performed in dollars.
This is no longer the case. Events over the last few years have lowered the world's perception of the dollar. The central question to ask is not how to restore the dollar's prestige but where is the dollar headed.
The primary reason for this loss of prestige is the US' reckless fiscal policy. Currently, the total outstanding debt is just below 8 trillion. Last years' trade deficit was 617 billion. These numbers are unsustainable over the long-term.
Starting about two years ago, the currency markets started to sell the dollar because of the twin deficits. The markets were very clear;
traders continually site the deficits as the primary reason for their bearish sentiment. However,
because no one in the administration understands the messages that markets communicate, their actions have only exacerbated the situation beyond repair.
Bush's final chance to head off the dollar's fall was State of the Union address where he stated he would propose a budget that was tough on spending. Since that time he has
1.) Proposed a Social Security spending plan that would increase outstanding debt by at least 1-2 trillion, and
2.) Issued a budget that does not include the cost of Iraq and Afghanistan.
In other words, Bush has officially dropped the ball and told the markets that deficit reduction will not occur on his watch.
Over the last year we have seen the following clear signs the world no longer places preeminent value on the dollar:
1.) According to a Financial Times survey, money managers are now wary of making dollar investments.
2.) China, South Korea and Japan have all publicly stated they will diversify their assets away from dollars. While all three countries did renounce their statements, the uniformity of the announcement and retraction leads to the conclusion this is a coordinated effort to warn markets.
3.) China's foreign reserve of dollars decreased 8% in 2004.
4.) India decreased its foreign reserves from 68% to 43% of total reserves in 2004.
5.) Asian banks have formed the Bellagio Group, a "discussion group" aimed at helping members deal with currency market fluctuations.
6.) The European Wall Street Journal printed a story last year stating there was talk of a credit downgrade of US debt.
7.) Russia floated the idea of converting oil pricing to Euros.
The combination of all these events leads to only 1 conclusion: the world is slowly moving away from the dollar. The formation of the Asian "discussion group", combined with India's and China's actions of lowering their dollar exposure indicate this movement away from the dollar is irreversible. Granted, the world is in a difficult trading position. Most countries depend on the US market as a place to sell their goods. Therefore, no one wants to permanently damage the US. However, US trading partners' intentions are nonetheless clear. It is also apparent that the number and magnatude of these events indicates nothing will stop these events from continuing.
The dollar's position as the world's preeminent currency are over.