Long gone are the days when a Nixon administration official could quip: “The dollar may be our currency but it's your problem.” Gone too, it seems, is the assertiveness Timothy Geithner showed in January when he accused China of manipulating its currency. Events have since forced the US Treasury secretary to look to home. The trade-weighted dollar has fallen by 10 per cent after it peaked at a three-year high in March, prompting Mr Geithner to say this week that his “basic obligation” was to put in place policies that kept confidence “in our currency, that we sustain a strong dollar”.

A strong dollar is certainly in the US interest if it wants to enjoy what France's Valéry Giscard d'Estaing once dubbed its “exorbitant privilege”. Yet the funding advantage of issuing copious IOUs in the global reserve currency now faces its biggest test as the US budget deficit hits 13 per cent of gross domestic product and unfunded liabilities reach four times GDP. Bill Gross, the bond fund manager, has mused it will not be long before the US loses its triple A credit rating. Some even refer to the “American peso”.

China, for one, has made clear it views the Federal Reserve's decision to print money to buy US Treasuries as a “policy mistake”. With $2,000bn of reserves, Beijing has already taken some defensive steps. Over the past eight months, it has increasingly bought short-dated US Treasuries over longer maturities, insulating itself against an increase in bond yields should the Fed's quantitative easing backfire. Spreads between two- and 10-year maturities have ballooned during this period.