Dominance of U.S. currency diminishing.

MALAYSIA isn't a place traders look for clues about the U.S. dollar, yet Asia's No. 10 economy may be offering some ominous ones.

They can be found in a recent report on international reserve holdings at Bank Negara Malaysia, the nation's central bank. It states that Malaysia made a $2.1 billion "revaluation gain" in 2004, "arising mainly from the depreciation of the U.S. dollar against the major currencies."

Central banks are always reticent to detail their holdings, but one can't help but wonder if Malaysia is buying an increasing amount of euros--or even yen--these days. Its central bank sure didn't make that kind of cash holding the dollar, the currency, to which its own, the ringgit, is pegged.

The plot thickens when you consider how such a shift away from the dollar would jibe not only with comments from top Malaysian officials, but trends throughout Asia.

In Malaysia, for example, Prime Minister Abdullah Abroad Badawi recently said he is seeking ways to reduce the economy's reliance on the dollar for trade. Indonesia has mentioned it is considering trimming its holdings of U.S. Treasuries. The same goes for Thailand, according to the Financial Times.

China also has been in the news as traders speculate that Asia's No. 2 economy may pull the plug on dollar-denominated debt. Such a move by, the second-biggest holder of U.S. Treasuries after Japan could send shockwaves through global markets.

Hence all the fuss over the comments made by Chinese economist Fan Gang. Fan isn't a government official: he's director of the state-owned National Economic Research Institute in Beijing. The connection seemed close enough for traders who found great relevance in Fan's remark that China has lost faith in the dollar, to which its currency is pegged.

"The U.S. dollar in our opinion is no longer (seen) as a stable currency and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English, at the World Economic Forum in Davos, Switzerland. "So the real issue is how to change the regime from a U.S. dollar pegging to a more manageable reference, say euros, yen, dollars--those kind of more diversified systems."

Paul Donovan, London-based senior global economist at UBS AG. seemed to speak for many traders and investors when he said: "This, in fact, is a scenario we consider to be highly likely'."

Certainly more likely than, say, China letting the yuan trade freely.

Fan's views have a certain logic. Irony, too. The U.S. has been using its might to bully China into revaluing the yuan. Yet it seems it is U.S. weakness--a fragile dollar--that may be the catalyst.

It means now is as good a time as any lot this region to avoid losses ahead of any surge in U.S. debt yields. Waiting means Asian central banks may lose even more.

Confidence in the dollar wasn't enhanced by President Bush's record budget deficit forecast of $427 billion for this fiscal year. It belied assurances that the White House will bring one of the world's most worrisome economic imbalances under control.

All this has investors turning to the euro. Once Asian central banks do, the dollar's woes will worsen. By buying vast amounts of Treasuries, Asian central banks are delaying the rise in U.S. yields that would typically accompany a falling currency.

If Asians pull the plug. U.S. rates could skyrocket. Central banks don't buy U.S. debt out of altruism. Hoarding dollars is necessary to hold down currencies to boost Asian growth. Yet dumping dollars would result in stronger Asian currencies, and, by extension, Asian gross domestic product.

Smaller economies such as Indonesia, Malaysia or Thailand may be able to trim dollar holdings without undermining their own economics. The same cant be said of Japan and China; combined, they own 5906 billion of the roughly $1.1 trillion of U.S. Treasuries held overseas.

Still, the day of financial reckoning that investors fear may be getting closer.

It has long been said that Japan's bond market is a bubble waiting to burst. Even with a national debt approaching 150 percent of GDP, 10-year Japanese debt yields just 1.32 percent. Asians have to wonder if U.S. rates are irrationally low, too. Do yields at 4.19 percent for U.S. 10-year debt really compensate investors for the risks they face?

The U.S. finds itself in a be-careful-what-you-wish-for situation. If China tomorrow announced it was letting the yuan float, as the U.S. wants, its central bank wouldn't need anything near the $191 billion of U.S. debt it holds. Massive dollar selling could follow.

Asian central banks like China's have become America's bankers, financing its excesses through good times and bad. It's now up to Asia to decide whether to extend the U.S.'s line of credit. The U.S. should be warned that the odds are moving less and less in its favor.

William Pesek is an Asia-based columnist for Bloomberg News.