According to the Financial times the Euro accounts for 26.4% of foreign reserve holdings, up 2% from 24.4% just six months ago. However there are now more Euros in physical circulation than Dollars and most tellingly more international bonds are issed in Euros than Dollars.

As a special kick in the pants there's this:

But the Commission report cited empirical studies highlighting the increasing “gravitational pull” of the euro on foreign exchange markets, which was becoming “more important for certain emerging market currencies, notably in South America”.

When South America, of all places, is moving off the dollar, you've got problems. This is America's Monroe Doctrine imperial backwater.

At this point only inertia (dollar reserves built up in the past) and the still primary role of the dollar in buying oil are keeping the dollar as the world's primary reserve currency.

With the US still intending to drop interest rates (and thus further crash the dollar) and with the European Central Bank apparently intending to hold still, this is likely to continue. When the US goes into a real recession there may be a modest recovery of the dollar but I doubt it'll be more than modest.

The dollar hegemony's risky future was obvious almost four years ago when Stirling, Oldman and myself were writing about for the late BOP news. The cost will be more than folks want to admit, Oldman once calculated that it had been worth .5% GDP growth per year every since Bretton Woods.

But the key moment is when US consumers stop being "the consumer of last resort" and other currencies actually float against the US. As with a drug dependency, while it's necessary that this happen, the US is far too physically addicted for the process to be anything but extremely painful, leading to, quite likely, a 20% drop in the US's standard of living in a period of two to three years. Mishandled it could go as high as 30%.

When will that happen? When the drug dealers (China and Japan, primarily) cut the crack-head off because Uncle Sam's credit is no good any more. They've got really good reasons not to do that, but they're also staring at that huge pile of dollars and realizing that if they ever actually try and spend it, the very attempt to do so will make it worthless.

Catch-22, because Japan's addicted to effective negative interest rates and China's addicted to huge export subsidies courtesy of their undervalued currency. But Japan is beginning to realize that low interest rates aren't getting them out of their doldrums, and China's endless running of the money presses is coming back as a nasty case of runaway inflation that is far worse than the headline numbers indicate, because the inland areas which have almost no inflation are being averaged with the coastal areas which have double digit inflation.

Three addicts, none of who have been willing to get off their relative addictions, propping each other up.

Wonder who'll fall first.