The U.S. economy is on the way out, says Dave Gonigam in The Daily Reckoning’s blog, Desidooru Saloon. Dave has picked up on a report from the Financial Times that says an anonymous Gulf sovereign wealth fund has slashed its dollar-based holdings. China’s biggest holder of dollar reserves, the State Administration of Foreign Exchange, is also reducing its dollar exposure…

What do sovereign wealth funds and Russia’s latest foreign policy strategy paper have in common? They’re both a vote of no confidence in a crumbling US empire.

The Financial Times reports a “big sovereign fund in the Gulf” has slashed its dollar-denominated holdings from 80% a year ago to 60% now. We don’t know which fund, exactly. It says something about power when an entire SWF can make a move like that and maintain the sort of anonymity in the papers usually reserved for individuals — you know, “senior administration officials” and the like.

The FT says SWFs are growing tired of pumping money into US commercial and investment banks with nothing to show for it thus far.

Behind the scenes, fund officials are questioning the credibility of the Federal Reserve and US Treasury in defending the dollar and maintaining financial stability. Reacting to last year’s collapse of structured investment vehicles, the head of one Middle East fund said: “I thought the problem of off-balance sheet had gone away with Enron.”

Now that’s naivety. But as I’ve pointed out before, sovereign wealth funds are first and foremost government entities. And we all know what folly governments are subject to. But the SWFs are catching on quickly. No more rescue packages for Citi (C) and Merrill (MER), I guess.

Meanwhile, China’s biggest holder of dollar reserves, the State Administration of Foreign Exchange, or SAFE (did they come up with an English-language acronym by design?), is starting to play catch-up to Singapore and other SWFs in reducing their dollar exposure. In particular, SAFE is seeking private equity deals in Europe.

By allocating money to Europe-based private equity firms, SAFE could diversify away from the dollar, at least at the margin, without spooking the currency markets and driving the dollar down in a disorderly manner.

Whether China can pull off such a gambit remains to be seen. But as wages continue to rise in China (Western companies looking to outsource are skipping China and turning to Vietnam and Bangladesh these days), we get ever closer to the turning point Dan Denning identified nearly a year ago — the point when it becomes logical for China to give up its floating peg to the dollar altogether.

And what about that other primary challenger to U.S. hegemony, Russia? The new president Dmitry Medvedev has issued a foreign policy strategy statement — Russia’s first since Vladimir Putin issued one in 2000. No big changes, really — except in how Moscow now views the global balance of power. As reported in Russian media:

The authors of the previous document criticised the unipolar world pointing out that “Russia will press for a multipolar system of international relations.” The new document states that this goal has been successfully accomplished.

Source: No Confidence