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The Ever Shrinking U.S. Dollar

The shrinking dollar skidded to a new low against the euro overnight though it's off its lows as markets await the release of Fed minutes and its forecast later today. In the stock market, a spirited rally started to run out of steam by midday. The financial stocks, losers of the morning, recovered some ground but were about 1.5% lower, feeling the drag from deep declinesin Freddie Mac and Fannie Mae .

Treasuries found support, and the yield on the 10-year was again slipping to the 4.09% level from 4.11%, earlier in the morning. The dollar lost more than a percent overnight, hitting $1.4814 against the euro but at midday, it was trading at $1.4774.

Weakness in the dollar is driving gains in oil and gold. Crude rose more than $2.49 per barrel to just above $97 per barrel. A roaring rally in energy stocks helped lift the market. The S&P energy sector was up 2.6%.

The dollar's weathered a lot of critics this week despite its tumble. First at the OPEC heads of state meeting this weekend, Venezuela President Hugo Chavez and Iranian President Mahmoud Ahmadinejad teamed up in a bid to use the falling dollar as a "soft" target in their war of words with the U.S. Ahmadinejad called it a "worthless piece of paper" and the two made it clear they would push to have oil priced in a basket of currencies. Saudi Arabia, hosts of the meeting,

Comments from Chinese officials Monday were more of a concern. Premier Wen Jiabao in Singapore said Beijing is under pressure to preserve the value of its reserves, most of which are in dollar assets. "We are worried about how to preserve the value of our reserves," Wen told a group of businessmen, according to Reuters. In South Africa, China's Central bank governor Zhou Xiaochuan said China hoped for an orderly solution to the tumult in currency markets.

I spoke to Goldman Sachs International vice chairman Robert Hormats about the dollar's fall. "I was in China last week. There is a growing lack of confidence,. but it has not reached the point of crisis yet," he said. "I think people are going to look at the dollar over the next six months with a higher level of scrutiny. They're going to want to see what the economy does and how quickly we get out of this subprime mess, and (whether) there (is) support for the dollar at these levels."

Last week, the governor of the United Arab Emirates Central Bank said the six countries in the Gulf Co-operation Council should ultimately peg their currency to a basket of currencies because of the dollar's weakness. "I think the Venezuelans and Chavez and Iran and Ahmadinejad ..I think they are considered to be on the fringe of OPEC as opposed to the Saudis or the Kuwaitis and the others who are the major players in OPEC," said Hormats.

"I think preserving the dollar's role as the premier reserve currency is clearly very important to the United States," he said. "There's a lot of advantages to having the dollar being the premier reserve currency."

"For the first time ever, we have a competitive currency," he said. In the past, the dollar was unchallenged and there were no alternatives but the euro's strength raises the idea that it could grow into the reserve currency of choice. "The euro isn't there yet but there's going to have to demonstrate by the way our economy performs and the way our financial markets perform that the dollar can still play that role as the premier reserve currency."

Treasury Secretary Hank Paulson was out again Monday, talking up the dollar and said the long term strength of the U.S. economy will keep the dollar strong. "I think Paulson is correct," said Hormats. "I think the long-term health of the economy and the financial markets will keep the dollar strong but people are going to watch to see if the economy is long term healthy and the financial markets are in the long term, healthy."

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.