Investors and market analysts are increasingly worried that the last big source of support for the US dollar -- heavy buying by foreign central banks -- is fading.
The anxiety was on full display on Friday, when the dollar abruptly slid to a record low against the euro after a report suggesting that the Chinese central bank would start to reduce its holdings in the US currency.
Though Beijing officials later denied the report, and the dollar recovered, analysts say the broader trend is that foreign governments are becoming less willing to finance the growing debt of the US government.
On Tuesday, a top official with the Russian central bank said his government had become worried about the sinking value of the US dollar and might switch some foreign reserves to euros.
A day later, India's central bank hinted that it was worried about the same issue and might shift some reserves into other currencies.
Japan and China, which together have amassed nearly US$900 billion in US Treasury securities, have both slowed their buying sharply from the frenetic pace in February and March.
"There is an emerging consensus that banks around the world are moving to expand their reserves of euros at the expense of dollars," said Laidi Ashraf, chief currency analyst at MG Financial Group in New York.
The Bush administration has essentially condoned the dollar's decline. At meetings with foreign ministers last week, US Treasury secretary John Snow repeated the American mantra of support for a "strong dollar" but also for letting "market forces" determine exchange rates.
A continued decline of the dollar would be good for US manufacturers, because it would make exports cheaper in foreign markets and push up the cost of imports.
But a diminished foreign appetite for dollars could push up interest rates. The Federal Reserve has already raised short-term rates four times this year, but the shift in the sentiment of foreign investors may soon seriously affect long-term rates that influence the cost of home mortgages.
"Sell US, buy Europe," summed up Richard Berner, chief US economist at Morgan Stanley, in a report last week. Berner noted that investors had begun demanding higher yields for 10-year Treasury securities than for comparable European bonds, and he predicted that the spread would widen.
Recent data from the US Treasury Department indicates that foreign governments have sharply slowed their purchases of Treasury securities. The question is whether those purchases will continue to slow or start to increase again as countries try to shore up the US currency to help maintain their own industries' competitiveness.
Japanese purchases of Treasury securities, which ballooned by about US$100 billion from October last year to March of this year, have slowed sharply and actually declined slightly in September.
Largely as a result, the dollar has sunk to its lowest level against the Japanese yen, about ?102.5 to the dollar on Friday, in four and a half years.
Chinese purchases of Treasury securities slowed to a crawl, increasing just US$2 billion in September, to US$174 billion.
On Friday, a top Chinese central bank official denied reports in a Chinese newspaper that the government planned to reduce its holdings of Treasury bonds.
The US' current account deficit, the broadest measure of its indebtedness to other countries, is on track to exceed US$600 billion next year, about 6 percent of its GDP.