A regular hazard that hasn't appeared for a while is a comment from an Asian government fund manager about the need for currency diversification — that is the need to reduce dollar holdings. Such a comment if it occurred today, would no doubt hit the dollar like a jolt. The weakening dollar has not been a central topic of the Federal Reserve where it doesn't even rate mention in FOMC statements. The administration repeatedly restates the importance of a "strong dollar," comments that are causing eyes to roll in Europe.

The above graph tracks the dollar's slide over the past five years as measured by the broadest index available. The dollar has lost more than 20 percent of its value over this time and is down not quite 25 percent since its peak in July 2001. The graph below is the same index over the same period in percentage terms. Only briefly in late 2005 and early 2006 has the dollar shown even the slightest year-on-year recovery. Percentage declines are nearly double digit and may hit double digits when this index is updated for March.

The decline of the dollar has of course led to a rise in the value of foreign currencies, giving foreign purchasers more buying power for dollar-priced goods and services. This has proven to be a good deal for the nation's exporters, a group dominated by industrial manufacturers who are helping to support the global infrastructure boom. Export growth has been in the double digits throughout this period as seen in the graph below. U.S. companies are reporting a fat currency benefit of about 5 percent for export sales, the highest level during the dollar's long slide. The highlight of yesterday's ISM manufacturing report was continued strength in exports, the report’s only reading that has yet to turn south. Annual exports make up a sizable and rising 12.5 percent of the nation's $11.7 trillion economy.

But there's the other side of the coin as the decline in the dollar has decreased our purchasing power for foreign goods. From machinery to spaghetti, U.S. buyers are paying more for imports — that is paying more for the same thing which of course is inflation. The graph below shows another double digit change and this time an unwanted one as year-on-year import prices are at their worst level in 20 years of records.

The next graph compares import price inflation against overall consumer inflation over the past 10 years. Import prices swing in a wider range, as measured on the right side of the graph, but the pattern of change is unmistakably similar with the blue line of consumer inflation often shadowing the advance track of import inflation. The import/export price report, which is released a few days ahead of the CPI and PPI reports, is certain to become a more important date on the economic calendar.

Another date that is certain to gain in importance is the release of the Treasury International Capital (TIC) report, which is posted at mid-month each month. The decline in the dollar has so far had surprisingly little effect at stemming foreign demand for U.S. securities. Foreign demand for U.S. equities has held in despite the nearly double digit negative currency effect and despite six months of slowing in stocks that has seen year-on-year appreciation move from 20 percent to nothing. Foreign demand for U.S. equities, as seen in the graph below, didn't pick up steam until about 2006, which is when momentum in the stock markets began to build going into the mid-2007 subprime collapse. The collapse is evident in this chart which shows a giant and hopefully one-time net decline in August when foreign accounts fled to cash.

But equities are just one level affected by foreign demand. The graph below shows net change for all securities, and here again the results are similar. Net foreign inflow is holding at the $50 billion a month level, steady but enough to fund only half of the nation's combined trade and fiscal gaps. Erosion in this set of data, again released at mid-month, would offer critics of dollar policy their smoking gun.

Bottom line

Diverging interest rates are another major negative for U.S. securities. The effects of the U.S. housing contraction and subprime collapse appear more and more to be centered here, not overseas. Interest rates are falling here, not in Europe or Asia where they remain steady, an imbalance that will push funds offshore.

Aside from warnings over currency diversification, watch for comments and statements at the official level. Foreign patience is definitely running thin as U.S. industrial firms enjoy the benefit of what has become the nation's unilateral devaluation.