I doubt if the Saudis et al want to give up the US military umbrella in the near future. I don’t see them from pushing away from the dollar peg in the near-future.

I am sure that the Saudis are looking at the Brazilian economy and trying to figure out what happens to their own if the US focuses on becoming energy self-sufficient using bio-fuels and other alternative energy forms. The thought of American electric cars powered by nuclear or coal-fired power plants probably keeps them awake at night. If the Us went there, the Chinese would probably follow in short order.

The US economy and governments are tripping all over themselves these days, but no serious student of economic history should forget what the US economy did in the transition from the Great Depression to World War II. The last thing the Arabian peninsula wants to see is the US address energy the way they did World War II. Attacking the US dollar would be a major way to precipitate that.

While China, Russia and Iran would like to see the dollar come down a notch or two in importance, I don’t think other major oil players like the Saudis and Canada are in as big a rush.

Nonetheless, the trend of diversification into other currencies has been ongoing for several years. Admittedly it is a slow process and no central bank would likely want to fuel a dramatic slide in the dollar and/or a sell of in US Treasuries given that central banks would end up damaging the value of their own holdings.

Although the dollar is unlikely to quickly lose its role as the world’s reserve currency central banks in Asia have realised that they are heavily exposed to dollar assets, especially US Treasuries and are likely to continue to look for alternatives in the form of other currencies as well as commodities.

Yet, all those with a peg to the dollar certainly appear to do just that – accumulate and hold dollars. If one or two or a few of the more minor players with a peg to the dollar refused to do so, It might not necessarily make much of a difference, I suppose. But when you’re pegging your currency to the dollar you don’t want the dollar to weaken too far, too fast, for obvious reasons. So buying up and holding the dollars to keep your currency pegged results in keeping the dollar afloat via sustained demand for it, and this tends to keep it from weakening too far too fast. But if private investors start to sour on the dollar, then it may still decline, as it is now doing. So the CBs have to start thinking more about “intervention”. With the dollar showing so much volatility over the past couple of years especially, pegging to it isn’t turning out to be much fun.

Maybe the peggers need a new round of the global crisis to cause global investors to rush back into the dollar in renewed risk aversion, so the dollar won’t continue its slide for now. Sarcasm. But this could unfold. Where I’m most worried, though, is down the road a year or two, when the dollar’s fundamentals get so ugly that investors don’t even see it as a place to take refuge in the storm.