For months, governments around the world have threatened to diversify their currency reserves away from the dollar.

Now, they are putting their money where their mouths are.

Central banks increased their foreign currency holdings by $413 billion, or 6 percent, last quarter.

That was the biggest rise in at least six years, according to Bloomberg News.

And for the countries that reveal how they allocate that money, 63 percent of the fresh cash went into yen and euros during the second quarter, soaring from 37 percent 10 years ago, according to Barclays Capital.

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” Steven Englander, a former Federal Reserve researcher who is now chief U.S. currency strategist for Barclays, tells Bloomberg.

“It looks like they are really backing away from the dollar.” He thinks the trend accelerated last quarter.

The central bank moves represent part of a vicious cycle for the dollar.

The Dollar Index has dropped to a 14-month low amid concern over the mushrooming U.S. budget deficit and debt burden.

That decline has led central banks to diversify, and their diversification moves could push the dollar down further. Meanwhile, gold continued its record-breaking run to nearly $1,064 an ounce in late trading Tuesday

“The dollar is a terribly flawed currency” investment legend Jim Rogers tells Moneynews.com.

“Everybody in the world knows that, including the head of the World Bank. . . even though he’s an American citizen.” Rogers was referring to Robert Zoellick.

Meanwhile, traders are selling short-term Treasuries to brace themselves for an interest rate hike by the Federal Reserve. Many pundits are screaming for such an increase sooner, rather than later, to stave off inflation and save the dollar from collapse.

Once the Fed raises rates, of course, short-term Treasuries will drop. The Fed has kept its federal funds target rate at zero to 0.25 percent for months to insure an economic rebound.

But Fed officials have started talking about the ultimate need for a reversal in policy, though none has suggested that it’s coming imminently.

There also have been several reports that the Fed is running tests with banks to drain cash from the financial system.

Fed officials are worrying about the inflationary impact of explosive increases in the budget deficit and government debt burden.

The two-year note yield has risen 10 basis points to about 1 percent in the past week, though it still remains well below a 2009 high of 1.45 percent on June 8.

"The front end of the Treasury (market) is up against the wall," David Ader, head of government-bond strategy at CRT Capital Group, told The Wall Street Journal.

Treasury traders are going to be very nervous about the Fed, he says. “There is going to be a great deal of volatility."

He doesn’t expect a plunge in short-term Treasury prices, with official rates so close to zero.

Still, “the short end of the Treasury curve has the most to lose on a relative basis,” William O’Donnell, a bond strategist for RBS Securities, wrote in a note to clients.