While New York Times columnist Paul Krugman believes that interest rates are the main driving force behind the increase in foreign holdings of the dollar, Washington Post columnist Zachary Goldfarb suggests fear driven by economic uncertainty is the primary reason for the increased dollar holdings.

"What has changed is that with zero interest rates, the opportunity cost of holding cash has gone way down," Krugman wrote. "[I]t's not fear; it's despair: there's nothing to invest in, so why not keep stuff under your mattress."

Goldfarb admits that a combination of fear and low interest rates are driving holdings of U.S. currency — namely in the form of $100 bills — to record levels, and more cash dollars actually are being held abroad than in this country. But he doesn't think they are the primary reasons.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Economic uncertainty in far corners of the world is a prime component of why the U.S. dollar is so attractive abroad, he explained.

"If you're in another country with high inflation or severe instability, one of your main concerns is going to be preserving your purchasing power."

Argentina and countries in the former Soviet Union, which have suffered extremely high inflation, are the source of much of the dollar demand, a landmark paper by Ruth Judson of the Federal Reserve showed.

Judson's paper concluded that about 70 percent of U.S. currency today, much of it $100 bills, is being held outside of the country, compared with about 50 percent 20 years ago.

When economic uncertainties arise elsewhere, it tends to push down interest rates in the United States, Goldfarb remarked.

"When you're worried about your local currency rapidly losing value, or getting access to your cash if your banks fail, it seems unlikely that a major factor in your decision-making will be whether you get a modestly higher return on your cash holdings in a U.S. account or investment," he explained.

Automated Trader, which covers currencies and other global financial products, suggested the trend toward more foreign holdings of the U.S. dollar is continuing.

"Central banks are probably continuing to reduce their duration in U.S. Treasurys given an environment of rising yields in the U.S. and outflows out of Emerging markets which create a demand for USD [U.S. dollar] cash," the publication said.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.