It's about time that the iPhone gets a custom dictionary, and according to this screen from the latest iPhone OS 4 beta, you'll find one under keyboard settings. Duck yes! (Discover more recent iPhone OS 4 findings here.)
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Regarding any settings needing to be altered for this, Gizmodo Reader Dustin notes that "The only setting I changed was [that] I reset the network settings so I could see the new tethering option." [Thanks Dustin!]