Over the last 25 years so called bond vigilantes influenced fiscal and Federal Reserve policy in the United States, there has now been a shift to the "Dollar Vigilantes."

In the 1980s and 90s the financial world was policed by the "bond vigilantes" that would threaten when the US government fiscal policies got out of line or the Federal Reserve monetary policy was viewed as easy. The implied threat would be that if investors became concerned about inflation they would react by selling Treasury bonds. Over the last decade this has fallen by the wayside as foreign governments became the larger buyers of US government debt. They would buy regardless of what happened as they had to recycle and invest their trade surpluses in US dollars. As these foreign reserve holdings have approached $1 trillion for some countries, concern has arisen about the need to diversify away from the dollar. China's foreign reserves are now thought to have exceeded $1 trillion. China's Central Bank Governor Zhou Xiaochuan among others has spoken of China's intention to diversify its dollar holdings. This sentiment has been echoed by central bankers around the world. Counties around the world are now less inclined to hold dollars. This has eliminated a natural support for the dollar that has existed over the last 4-5 years. The following chart (Fig. A from the European Central Bank), the explosion of foreign exchange reserves that has developed in many countries around the world. These countries are now paying much closer attention to what happens with the US dollar as their holding have gotten to be so large. The foreign exchange numbers for the counties listed in the chart below will be materially higher across the board for 2006.