Jonathan Bernstein brilliantly counters the counter-arguments raised by dollar bulls:
Plenty of people try to tell us that this overhang is “not a problem.” They say that the world is used to running on dollars. Governments, banks and corporations are used to doing dollar based transactions, they tell us. Moreover, no other currency can match the deep and liquid market that Treasurys afford. Even though the Eurozone is a huge economic bloc, Eurobonds issued by Italy, for example, are not the same as Danish or German government bonds. So everyone agrees that a complete transition to a new currency regime would take time, but is that truly a reason for doing nothing? It may be that today the dollar is the best place to park wealth, but sooner or later the countries with wealthy central banks will find a way to put their money where they want to. If we don’t make the dollar more attractive, foreigners will eventually take their money elsewhere. It’s that simple. <snip>
Our press also lulls itself into complacency regarding large dollar holders such as the Chinese. It would be hard for China to sell in size, dollar bulls say. The market couldn’t absorb that selling, the dollar would crash, and the Chinese would themselves wipe out the value of their own dollar holdings, bulls argue.
My fourth reason for ongoing dollar weakness: we don’t have a strategy for maintaining the dollar. We just keep hoping that China and our other trading partners will continue to do what suits us. That’s irrational. Other countries that hold dollars will act in their own interest. We should figure out what that is likely to be and prepare accordingly.