Swooning Beautifully; Falling greenbacks used to induce economic panic. Now, it seems, the dollar's demise may actually be a good thing for America and the rest of the world.

Byline: Emily Flynn Vencat

Not so long ago, a single dollar was considered a pretty good tip for bellhops around the world. But lately, Megan Carrella, a 34-year-old New York executive who travels regularly from Mexico to Greece for business, has found hotel help less enthusiastic about her usual palm. She's taken to handing out at least two or three greenbacks to guarantee good service. "People used to really smile when you gave them a dollar," she says. "Now it seems almost like an insult."

Bellhops aren't the only ones whose love affair with the dollar is over. Since the dollar's peak in February 2002, it has now fallen 20 percentage points against a basket of global currencies including the rupee, Canadian dollar and real, with 3 percent of that fall coming in the past three months. Countries all over the world are dropping their local currency pegs to the dollar, and eurobonds are beginning to compete with the almighty T-bill as a reserve currency in places like Russia and Sweden. There's even a movement to start pricing Brent crude oil in euros rather than dollars. "Are we seeing the demise of the dollar?" asks Hans Redeker, head of foreign-exchange strategy at BNP Paribas. "Quite possibly, yes."

Not so long ago, that would have been reason for panic. But the disaster scenario of Asians' dumping the dollar, hastening its fall and triggering a global recession, never materialized--like cripplingly high oil prices, it turned out to be a phantom threat. In fact, the slow and steady slide of the dollar is helping to offset yet another threat--the massive U.S. trade deficit. All this is happening as America sheds its role as the world's unilateral superpower--something that is turning out to be a good thing, not only for Americans, but also for the rest of the world. The OECD in Paris predicts that U.S. GDP will rise only 2.1 percent in 2007, down from 3.3 percent last year. But the world's economic picture will be better than what it has been in years, thanks to the resurgence of Europe (led by Germany), the revival of Japan and the growing importance of countries like China and India.

As U.S. growth has waned, developing countries have begun de-pegging their own currencies from the dollar. Three weeks ago Kuwait made the move, following China, Russia, Malaysia and others. By dropping their dollar pegs, emerging economies free themselves from the constraints of U.S. monetary policies that are tailored to suit a slowing economy. This allows emerging economies to set interest rates to hit growth targets, rather than currency values, enabling them to control the risk of overheating. The shift has had several knock-on effects. Countries including Iran, Iraq, Libya, Venezuela and Russia are considering selling their oil in euros rather than dollars, in part for political reasons, but also because some of them (Russia and the gulf nations in particular) tend to buy more of their imports from Europe and lose purchasing power when converting their dollar earnings to euros.

Meanwhile, central banks that are less reliant on dollar moves can begin diversifying away from T-bills, and into more-productive, higher-yielding investments. Arab nations like Dubai, Bahrain and even Saudi Arabia are beginning to pour money once held in foreign reserves ...