Oct. 29 (Bloomberg) -- Bargaining while buying some trinkets in the Maldivian capital, Male, recently, I heard most unexpected words: ``You can keep your dollars.''

This tiny nation of 1,200 islands has long accepted U.S. currency out of convenience for visitors and financial sobriety. The dollar tended to do better in global markets than the local monetary unit, the rufiyaa. That may be changing and it's a bad omen for the world's reserve currency.

``My dollars aren't as popular here as they've been in the past,'' says Moyez Mahfouz, 51, who has visited the Maldives from Bahrain with his family once or twice a year for a decade. ``More and more on this trip, I'm being asked for rufiyaa.''

Why does it matter what happens in the Maldives? Its $1 billion economy is worth 1/59th of Microsoft Corp. co-founder Bill Gates's wealth and 1/27th of Sri Lanka's output. While it's an amazingly beautiful place, the Maldives is a rounding error on the global economic pie chart. Yet it may be a microcosm of a tectonic shift in finance: the demise of the dollar.

These things start out slowly, and in recent months I have had similar experiences from Mexico to Vietnam. In markets, restaurants, taxis and tourist shops that long accepted dollars, many are opting for local currency. The reason: concerns the dollar plunge that analysts have predicted for years is afoot and that the U.S. is uninterested in halting it.

Transformational Event

There's also a nascent realization that something transformational may be happening in global markets. Some states that long pegged their currencies to the dollar are scrapping the policy -- like Kuwait -- while others are quietly considering it. A survey by HSBC Holdings Plc found that twice as many Gulf businesses see benefits from dropping currency pegs to the dollar as those that see negative consequences.

Following Kuwait's May 20 move to drop its dollar peg, Gulf states are under pressure to do the same. The catalyst isn't so much anger over the Bush administration's policies, but how the dollar's slump is raising the price of imported goods. Inflation has reached record levels in Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Oman in the last 12 months.

President George W. Bush's handiwork doesn't help, of course. In December 2004, former Malaysian Prime Minister Mahathir Mohamad suggested Muslim countries should refuse to trade in dollars and use their economic influence to force a change in U.S. policies. The U.S. ``owes huge sums of money to the rest of the world,'' Mahathir said. ``If people do not keep giving money to the U.S., it will go bankrupt.''

`Rogue Nation'

For years now, Joseph Quinlan, chief market strategist at Bank of America Corp. in New York, has been warning that the U.S.'s image as a ``rogue nation'' is a key force behind the dollar's decline.

The subprime crisis doesn't help, and neither does the perception that U.S. officials -- who recently helped negotiate a bailout fund to calm credit markets -- are protecting reckless investors from losses.

``Bubbles are easier to inflate than to sustain,'' says Richard Duncan, a partner at Blackhorse Asset Management in Singapore, and author of the 2005 book ``The Dollar Crisis: Causes, Consequences, Cures.''

It also hasn't escaped Asians that Treasury Secretary Henry Paulson is talking out of both sides of his mouth. He supports a strong dollar while the U.S. stands to gain from its decline through more-competitive exports and repayment of international debts with cheaper dollars. That's the problem with beggar-thy- neighbor policies -- the neighbors realize what's going on.

Debased Dollar

Investors such as Jim Rogers, too. ``It's the official policy of the central bank and the U.S. to debase the currency,'' Rogers, a former partner of George Soros and chairman of Beeland Interests Inc., said in Amsterdam last week.

Not that the U.S. has enough currency reserves, $44 billion, to halt a dollar crash. The real stockpiles are in Asia. China has $1.4 trillion of reserves, followed by Japan with $923 billion, Taiwan with $263 billion, South Korea with $257 billion and India with $249 billion. Were Asians to dump dollars, the U.S.'s reserve-currency status would be in jeopardy.

The rise of sovereign wealth funds adds another wrinkle. There's much chatter in markets about whether these massive, politically connected funds will shift assets from dollars to euros or other currencies. Islamic finance also gives Gulf states an alternative to dollar-denominated markets.

View From Maldives

There are many arguments against dumping the dollar. The result of diversifying revenue for oil exporters and reserves held by central banks might be a dollar rout, says Larry Hatheway, a London-based analyst at UBS AG. The ensuing jump in U.S. risk premiums and the deflationary impact on the world economy could boomerang on OPEC and central banks via a collapse in oil prices and weaker exports.

With the euro coming into its own, the dollar looking wobbly and some nations miffed by U.S. policies, a slow and steady shift may nonetheless be under way.

Not that the Maldives can tip the balance. Yet the more nations, no matter how small, that begin eschewing the dollar, the bigger the challenges facing the U.S.