America has habits that are inappropriate, to say the least, for the guardian of the world's main reserve currency: rampant government borrowing, furious consumer spending and a current-account deficit big enough to have bankrupted any other country some time ago. This makes a dollar devaluation inevitable, not least because it becomes a seemingly attractive option for the leaders of a heavily indebted America. Policymakers now seem to be talking the dollar down. Yet this is a dangerous game. Why would anybody want to invest in a currency that will almost certainly depreciate? (...)
America's current-account deficit is at the heart of these global concerns. The OECD's latest Economic Outlook predicts that the deficit will rise to $825 billion by 2006 (6.4% of America's GDP) assuming unchanged exchange rates. Optimists argue that foreigners will keep financing the deficit because American assets offer high returns and a haven from risk. In fact, private investors have already turned away from dollar assets: the returns on investments in America have recently been lower than in Europe or Japan (see article). And can a currency that has been sliding against the world's next two biggest currencies for 30 years be regarded as "safe"?

If you thought record oil prices this year were a pain in your wallet, there’s more bad news on the horizon. The latest Bank for International Settlements quarterly report, which tracks the investment trends of oil-producing countries, indicates that Russia and OPEC countries are moving their holdings out of dollars and into euros and yen. OPEC cut its holdings in the dollar by more than $5 billion during the first and second quarter of 2006. And Russia now keeps most of its new deposits in euros instead of dollars. That decrease is swift and significant—and helps to explain why the dollar recently fell to a 20-month low against the euro and a 14-year low against the British pound. Holding dollars while other currencies gain strength means less profit for oil producers. But if they rapidly divest themselves of dollars, it may weaken the currency and push up inflation in the United States. "This new trend may be bigger trouble for the United States than high oil prices and surging Chinese exports," says Nouriel Roubini, a professor at New York University’s Stern School of Business. If this year’s move away from the dollar is a sign of future thinking by oil producers, the pain felt at the pump may soon be the least of our worries.