One sign that people may be losing faith in the U.S. Dollar - one of the world's most printed and held paper currency - is that the Greenback has recently lost favor with a number of central banks as a reserve currency.

This increasing lack of faith has led a number of countries to replace the U.S. Dollar with the Euro as a reserve currency over the last few decades, despite a relatively recent shift back to U.S. Dollars that has resulted in the aftermath of the European sovereign debt crisis.

Dollar Reserves Fall at Central Banks

According to numbers compiled by the International Monetary Fund on the currency composition of official foreign exchange reserves, the U.S. Dollar has fallen from a recent high of 70.9% of international reserves seen in 1999 to just 62.2% in 2009.

It seems that most of the Dollar's loss of favor has been taken up by the Euro, which went from 17.9% in 1999 to 27.3% in 2009. Nevertheless, the Pound Sterling has also benefitted to a lesser degree, rising from 2.9% to 4.3% over the same period.

Reasons for Shifting Reserves Away From Dollars

It seems that the Dollar's status as a reserve currency has been hurt at least partly because of such factors as:

• The almost surreal recent level of government public spending in the United States as the country attempts to spend its way out of recession.

• The seemingly endless and very costly overseas wars the U.S. military has been involved in recently.

• Ever increasing U.S. trade and budget deficits that suck funds out of the country or into servicing debt.

• The long term decline in the value of the U.S. Dollar, accompanied by an increasing lack of confidence in the country and its currency.

In essence, the U.S. Dollar no longer has the luster it once had when its value was tied to gold during the Bretton Woods system of fixed exchange rates.

Countries Express Concern Over Keeping Dollar Reserves

Some countries who have shifted or who have considered a shift away from U.S. Dollar include the Russian Federation, South Korea, Bahrain and Indonesia that have each expressed concern over using the U.S. Dollar as a reserve currency.

Russia has already reduced its U.S. Dollar reserve holdings, while the other countries may soon be following suit.

China Proposes Replacing Dollar With Special Drawing Rights

In addition, China recently proposed replacing the U.S. Dollar with a basket of currencies to be used for its reserve currency keeping purposes.

The basket of currencies the Chinese suggested were the International Monetary Fund's Special Drawing Rights or SDRs which are based on a currency basket that can change in composition.

At presently, the composition of the Special Drawing Right consists of 44% U.S. Dollars, 34% Euros, 11% Pound Sterling and 11% Japanese Yen. Maintaining reserves based on SDRs would tend to reduce reserve demand for U.S. Dollars considerably.

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