U.S. dollar-based investors should take notice that demand for U.S. Treasuries from foreign central banks hasn’t grown as fast as the new issuance during the first quarter of this year.

Central bank holdings of Treasuries at the New York Fed rose by close to $100 billion in the first quarter. That's is significantly down from the $250 billion increase in the fourth quarter 2008.

More importantly, foreign central bank reserve managers have practically stopped buying U.S. Agencies. We now see outflows from U.S. Agencies, as well as a shift out of large U.S. dollar deposits at the major international banks.

The pace of outflows from the Agency market is a warning against too much complacency on the United States’s part. If central bank reserve managers do lose confidence in an asset, they can go from buying large sums to selling large sums quite rapidly.

Most recent central bank inflows have gone into short-term Treasury bills. That could signal either that central bank reserve managers lost confidence in U.S. Agencies or confirm that they haven't been comfortable buying lots of 10-year dollar-denominated notes at yields under 3 percent and risking mark-to-market losses if Treasury yields eventually rise.

Of course, when the gap between the yield on short-term bills and longer-term notes gets large enough and attractive again, credit-risk adverse reserve managers could shift out of the short-term bills and into longer-term notes again. When that could happen is another tricky question.

The usual argument is that the United States will inflate away the value of China’s Treasuries. That argument clearly puts blame for any fall in the value of China’s Treasury holdings on U.S. policy makers. The bigger risk though is that the dollar will fall against China’s currency, the yuan, thereby reducing the value of China’s external portfolio in the yuan.

But take care: The fall in the U.S. dollar could happen even if inflation in the United States never picks up, as there are strong fundamental reasons to think that yuan should rise over time against the dollar and, for that matter, also against the euro.

If China and other countries were to diversify their reserve holdings away from the dollar — and there is no doubt in my mind they eventually will — the United States would suffer by losing the significant financial benefits of having the dollar as the world reserve currency that allows Americans to borrow at better rates while shifting the losses of a fall in the value of the dollar to their creditors.

Normally, the decline of the dollar might take more than a decade, but it could accelerate much more rapidly than generally expected if the United States doesn’t get its financial house in order and doesn’t stop spending more than its income.

In addition, the United States must stop pursuing growth that is based on asset and credit bubbles.

Investors, if they haven't done so already, should definitely consider starting to think outside the U.S. dollar box and among other choices, put the Chinese currency Yuan/Renminbi on their ‘acquisition’ list. This will allow them to get ready to act at moments when the dollar shows some (temporary) strength.

This shouldn’t be done impetuously and could need time. Remember, everything moves in waves, and that includes currencies. We are talking about investing, not trading.

On the stock markets I would like to advise to watch the 877 level today, Thursday, May 14, in the S&P 500.

The S&P 500 decline has started while the Investors Intelligence bullish reading was still at 81 percent yesterday. A 50 percent or greater bullishness reading almost always appears when the tops of major significance occur.

At this point, the best we can do is to say that a small-degree second wave peak at 914 in the S&P 500 and 8,517 in the Dow should hold and lead to a drop that stops somewhere north of the March lows of 667 in the S&P 500 and 6,470 in the Dow Industrials.

Yesterday we saw an expansion of downside breadth in the NYSE advance.

Anyway, I think it’s time to take profits or go ‘short’ the markets.

On the euro, I would like to comment that a move toward $1.40 is still possible, but the euro’s failure to break above 1.3736 and the move back into the trend-channel suggests that the threat of a further euro rally is subsiding.

A decline beneath 1.3300 would be the first sign that a challenge of the low at 1.2889 is imminent.