What You Should Know About the World's Reserve Currency

Second, when the U.S. dollar loses value, as it's been doing over the past several years, other nations have more reason to move their reserve currency out of dollars and into other currencies that are doing a better job of holding their value, such as the euro. The result is a reduced demand for dollars, which can drive the value of the dollar down even further.

On Sept. 18, 2007, the Federal Reserve lowered the Fed funds rate and the discount rate by half a percent. Lower interest rates typically make borrowing money easier and mean an increased money supply, which tends to create inflation and devalue the dollar. The Fed's rate cut raised concerns about the dollar continuing to lose value.

In fact, Saudia Arabia, a country that pegs its currency to the dollar, refused to lower its rates in step with the Fed's rate cut for the first time. And earlier in 2007, Kuwait announced that it would no longer tie its currency to the dollar and instead would use a basket of currencies.

Oil exporting countries in the Middle East have been experiencing inflation and would actually need to raise their interest rates to reduce the money supply and lower inflation.

A weaker U.S. dollar means that the dollar may continue to lose ground to the euro as the world's predominant reserve currency. If the U.S. dollar continues to lose value, countries that hold U.S. dollars as reserves will have an incentive to move more of their reserves to a more stable currency, like the euro.