If the revised forecasts of the International Monetary Fund (IMF) are any indication, then the emerging Asian nations are expected to power global economic growth. The IMF raised its global growth forecast over the weekend, to 3.1% in 2010, driven by China and India, which are expected to grow 9% and 6.4%, respectively. The huge stimulus measures, greater stability in the developed markets, and rising demand from the Asian economies should lead the rebound. Clearly, this news gave investors reason to cheer. In fact, foreign investors have been making a beeline for the Asian markets, with FIIs pumping in about Rs 180 billion in September alone into the Indian bourses.

Given the huge flow of dollars ($) in India, it is worthwhile understanding the currency risk and its effect on major asset classes?equities being one amongst them.

The dollar is the world?s ?reserve currency?. This status is arguably the greatest privilege enjoyed by the US as an economic entity. As the world?s reserve currency, the dollar is used by countries across the globe to back up their own respective paper currencies. Upon reflection, it?s quite obvious how tenuous it is to back up one?s currency with a pile of paper issued by another country, but this is exactly how the world of international currency has worked for decades. And it has worked quite well?until now.

Despite falling 36% since 2001 (as measured by the US Dollar Index (DXY)), it is only recently that the US dollar?s ?world reserve currency? status has been seriously questioned. During the last two week of September, the DXY actually fell to new 2009 lows nearly every alternate day of those weeks. Over the last six months there has also been a substantial increase in anti-US dollar rhetoric from China, Japan, Russia, France, Brazil, and even the United Nations. Reading between the lines, it appears the US dollar hegemony has finally broken, and what happens next will have major consequences for the global economy.

Chart above illustrates the dollar?s value versus other major world currencies since 2000. One year ago, following the collapse of Lehman Brothers, the dollar experienced a strong rally as the world flocked to it as a safe haven. Back then, nobody complained about owning US Treasuries?they were the ultimate safe asset for anyone looking to park large amounts of capital.

Now that the panic has subsided, however, the international investment community has begun to question that choice. They have watched the US government abuse its ?world reserve currency? privilege by printing debt and currency by the boatload.

To fully understand the debt predicament currently faced by the United States, it?s best to look at the numbers. US government revenues for the 12 months ended August 31, 2009 were $2.2 trillion from all sources. According to the US Department of the Treasury, the current outstanding debt as of August 31, 2009 is $11.8 trillion. To this add the unfunded promises that the US government has made to its citizens namely medi-care and social security. While there are no bonds, bills or notes issued to support these promises, they represent real commitments that will require US dollars to honor them in the future. Because there is little hope of paying for their unfunded liabilities through current tax revenues, the social security and medicare promises will undoubtedly require new bond issues. What is glaringly obvious is that the United States? penchant for increasing its ?promises to spend? is directly threatening the future viability of the dollar.

Normally when countries have attempted to brazenly overspend, their currency (or their government debt) has met the wrath of the ?bond vigilantes? – rogue traders in international bond and currency markets who impose market discipline on sitting governments. In lay man terms the yields starts to harden as dollar bonds starts getting dumped leading to a ?dollar crises?.

At the end of the day, when the world finally realises what the US has done to the world reserve currency, international investors will shift into an asset that no government can print – precious metal. It seems that the US dollar?s status as a ?port? in the financial storm has officially come to an end.

?The writer is a derivatives analyst