This week Chinese President Hu Jintao is being wined and dined with a lavish state banquet at the White House and other official ceremonies usually reserved for America’s closest friends and allies. Why all the pomp and circumstance? One must be very polite when entertaining your banker—even if you don’t like him and he doesn’t like you.

Yet there is another more ominous but closely related reason Washington is rolling out the red carpet for China.

For years, China has warned America that its support for the dollar was not unconditional. The warnings fell on deaf ears. Reassured by academics and New York Times columnists that China was virtually forced to lend money to America, Washington embraced a borrow-and-spend policy that would have destroyed any other currency.

Then last year, when it became clear that America could not borrow enough money to pay the bills—it stepped boldly across the Rubicon—declaring that the laws of paper money no longer applied to the mighty dollar. Supply and demand, and America’s creditors, be ignored: America would just print up whatever money it needed to pay the bills. $900 billion—75 percent of America’s borrowing needs—would be conjured out of thin air, declared Federal Reserve Chairman Benjamin Bernanke.

The world was shocked that America would so callously abuse the world’s reserve currency. France, Germany, Russia and China were outraged. But Americans were reassured that the world is caught in a dollar trap and can do nothing about it.

And so far, things have worked out pretty well for America. With several European countries falling apart, the dollar has firmed up, and safe-haven money has continued to flow into America.

But is it possible that Washington might just now be starting to experience nagging inklings of doubt?

As the Washington Post wrote on Sunday, “strange things are happening in Europe—none stranger than the emergence of China as the continent’s sugar daddy.”

But wait a minute! I thought China was America’s “sugar daddy.” Which is it?

Just follow the yen—or perhaps more accurately, look who’s getting the sugar and who isn’t. In July 2009, China held $939 billion worth of U.S. treasury debt. More than a year later China’s holdings have fallen to $895 billion. This is big news—and surely isn’t lost on Washington. For more than a year, America’s most important creditor has stopped lending new money to America. And the money that it has previously lent to America, it has been rolling over to short-term loans as opposed to long-term.

Instead, China is investing its money, and its confidence, in Europe.

Today, Europe matters more to China than any place in the world—including America. That might come as a shock to some, but it shouldn’t. With 400 million First World consumers and the world’s largest economy, the European Union is by far China’s biggest export market. As American politicians continue to lambaste China for unfair trade policies, China’s trade with and attachment to Europe grows daily.

It is a reciprocal relationship, too. China now directly holds over $900 billion worth of eurozone national debt. In Greece, China is investing billions more as it attempts to build the Mediterranean port city of Piraeus into the “Rotterdam of the south,” and create a modern-day silk road linking Chinese factories with consumers across Europe and North Africa.

Most importantly, China has thrown its weight behind the euro.

Canada’s Globe and Mail reports that Vice Premier Li Keqiang’s recent trip to Europe literally transformed “Europe’s economic picture to an extent that no other foreign figure” has done. Li, China’s third in command, has in short, “become Europe’s rescuer.”

At a time when some commentators were predicting the collapse of the eurozone, Li, who is a favorite to become the next prime minister of China, appeared to throw China’s $2.85 trillion worth of foreign exchange reserves into Europe’s breach, promising to be a committed and responsible long-term investor in Europe. icbc bank, China’s largest lender, quickly followed suit, announcing that it will move full force into the eurozone. It will open its first-ever branches in France, Spain, Italy, Belgium and the Netherlands. It has already opened offices in Frankfurt and Luxembourg.

Li’s support is already paying dividends in Europe. With interest rates coming down from recent highs and successful debt auctions, Spain and Portugal got a welcome taste of what several billion euros’ worth of Chinese “sugar” can do. The sugar rush is an experience America has become dependent upon but has been doing without lately.

But China’s support for Europe is also creating some toothaches. “We hope that the EU will relax restrictions on high-tech exports to China and develop trade relations that are balanced and sustainable,” wrote Li last week. China not only wants more trade, but wants access to Europe’s defense companies.

Europe seems all too willing to do business. The EU’s Foreign Minister Catherine Ashton has already called for abolishing Europe’s arms embargo with China. Reportedly, American officials, who have to deal with a rapidly growing Chinese military presence in the Pacific, are furious.

But it was what Hu Jintao told the Wall Street Journal and Washington Post just prior to his arrival in Washington that should have all Americans preparing for one massive sugar crash. He raised important questions over the future of the dollar saying that it should no longer be used as the world’s reserve currency. It is a “product of the past,” he said. It is time for a more fair and balanced system. In a reference to American “money printing” he specifically said America needed to watch very carefully what it does.

But what does China think should replace the dollar? Hu himself said it wouldn’t be the yuan. What does that leave?

Follow the sugar.

“The euro will overcome the region’s deficit crisis,” assured Song Zhe, China’s ambassador to Europe, back in December. The cementing of the euro’s status will “promote the building of a diversified global currency system.”

Remember: When anyone talks about “diversifying” the global currency system, by definition it means ditching the current system—which is the dollar.

And China isn’t alone in shifting support to the eurozone. Just last week, Japan announced that it too would be stepping up its efforts to back Europe by purchasing eurozone debt. According to Reuters, Japan will purchase 20 percent of soon-to-be-issued Eurobonds. The Eurobonds would be jointly issued and backed by all members of the eurozone—creating a new debt market that will directly compete with U.S. treasuries. In case you are wondering where Japan would get the money to purchase Eurobonds, as America’s second most important lender, it has a whole stack of treasuries it would probably love to “diversify” out of.

If the world wants out of the U.S. dollar, there is only one viable paper alternative: Europe.

According to Li Daokui, an academic member of the Chinese central bank’s monetary policy committee, Americans only have months to prepare—while Europe works to get its act together. “For now, market attention is still on Europe and for the coming 6 to 12 months, it will not shift to the United States,” said Li on December 8. “But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. treasury bonds and the dollar will experience considerable declines.”

Strange things are happening in Europe. Now you know why. The international monetary system set up at Bretton Woods in 1944 is on the verge of breaking down and the dollar will soon be fighting for its survival as the world’s reserve currency.