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When It Comes to a Run on the Dollar, Talk Is Cheap

The bears' calls were early, and just plain wrong.

Now that the euro has completely cratered, and shows no sign of coming out of its hole, can the bears please stop trying to persuade people that U.S. stocks are dangerously vulnerable to a run on the dollar? This notion has been promoted

ad nauseum

by some Wall Street economists and commentators ostensibly seeking to protect investors from a total collapse. With friends like that, who needs enemies? At some point, being early is the functional equivalent of being wrong. That point is now.

I have nothing against bears. They are often dead right about inherent weaknesses in the market that the bulls just gloss over. But the dollar-as-stock-market-killer scenario is not one of those faults you need to worry about.

Let's quickly go over the scare story before we stick a knife in it. It's blessedly simple: The U.S. trade deficit is at its highest level in history. The main reason the dollar has remained strong is that foreigners, especially Europeans, have been investing in our stock market. This inflow of investment capital has more than offset the outflow of dollars needed to pay for our net imports of goods and services. At some unknown point, for some unknown reason, foreigners will decide that they no longer want to hold dollars. They will flee. U.S. interest rates will spike. The stock market will crash, and soon thereafter the economy and corporate profits will collapse.

Many intelligent people have endorsed the notion that a run on the dollar will do in the stock market. (In fact, the higher the IQ of the economist, it seems, the more he or she likes this scenario.)

Morgan Stanley Dean Witter

chief economist

Stephen Roach

has been a great proponent of this theory for years. As recently as May 1, he wrote, "The dollar is increasingly priced for perfection, whereas the Euro is perceived to be at the opposite end of the spectrum. The risk is that both views are wrong ... Should the dollar begin to sag just when investors are leaning the other way, the impact on other classes

i.e. stocks could be all the more pronounced."

Actually, the greater risk to investors was that Roach was wrong. Since May 1, the dollar has risen, the euro declined and U.S. stocks have rallied across the board. If you had listened to Roach, you might have missed a good part of the gain in the U.S., and you certainly would not have hedged your currency risk if you owned European stocks (for more on the future of the euro, read

John Hardy's piece).

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The Euro Collapses, Not The Dollar

Source: Reuters

Even in the worst days of the

Nasdaq bubble burst, nothing remotely like a run took place. Investors simply rotated into other dollar-denominated assets, if they rotated at all. Investors here and abroad simply have more confidence in the prospects for the U.S. economy and U.S. corporate profits than they do for Europe or Japan.

So far, investors have been right to ignore the Roaches of Wall Street. A soft landing in the U.S. looks likely. Japan's economy continues to disappoint. And in Europe, the real engine of growth is exports to the U.S.

Imagine what would happen to Japan and Germany if the U.S. did go into recession as a result of a dollar crisis. Their stock markets and economies would be hurt, too. We would be looking at a global slowdown. There would be few hiding places, with the possible exception of gold and cash.

I called Roach at his office in New York Thursday morning to discuss his dollar-crisis scenario, but he was too busy to speak. I did, however, get a kind call back from

Zurich Financial Services Group's

globetrotting chief economist David Hale, who was at an airport between flights.

Hale is up to speed on the issue having written a piece in Tuesday's

Financial Times

asking whether the dollar might weaken after the election if our next president pulls some bone-headed policy stunts that scare the currency market. But Hale does not believe we will see anything like a run on the dollar this year. "I am not alarmed about that in the short run," he says. "I think the trends supporting the dollar are very much in place for the rest of the year. Europeans are in love with the U.S. and I see no sign of a change in that."

So could all the bears just cool it until we hear the next president's inaugural speech in January? Stock prices could well go down, but not because of the dollar.

Brett Fromson writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He invites you to send your feedback to