When you think about it, the strong dollar has been a pretty good thing for the stock market. It makes foreign goods and services cheap for those here at home, keeping inflation and interest rates low. It also makes U.S. stocks a very attractive place for foreign investors to place the excess savings they've been accumulating from the huge trade surpluses their countries have been running with the U.S. Low inflation, low interest rates and a steady, growing flow of foreign money into stocks. Then,

Dow

11,000.

But recent fluctuations in the foreign-exchange market -- particularly in the dollar/yen trade -- have got some folks talking about a reversal of the massive current-account deficit, which checked in at a record $24.6 billion in June.

The story goes like this: As the rest of the world stumbles toward recovery, investors will redirect their money away from very expensive U.S. markets and into places such as Asia and Europe. The resulting capital outflows from U.S. markets will encourage dollar weakness, which in turn will encourage more capital to flee the country and will further depress U.S. stock prices.

Imbalances, after all, will tend to balance over time, won't they?

Perhaps. But in the near term, it's not at all clear to what extent global capital is really starting to act out the above textbook script, as some have been anecdotally reporting for weeks now. Though recent data on U.S. mutual fund flows suggest that investor sentiment is starting to sweeten toward international equities, we won't have solid information on global flows for July -- when the yen started gaining notable ground against the dollar -- for another two months. (The

Treasury Department's

monthly statistics on international capital movements have a two-month lag.)

In the meantime, the strategists hypothesize.

"All we can do now is watch the dollar," says Douglas Cliggott, market strategist at

J.P. Morgan

. "We know that we've got a growing trade deficit and balance-of-payments deficit. The dollar should be falling like a stone, but capital inflow is causing it to be flat or rising. And an increasing share of that capital inflow is going into equities as opposed to money markets or fixed income."

In the Center Ring: Astounding Inflows

The amount of foreign money in U.S. stocks is considerable. Foreigners have bought a total of $54.71 billion worth of equities in the most recent 12 months for which the Treasury has information. Even more astounding, though, has been the explosive increase of foreign capital inflows through M&A: According to J.P. Morgan's research, such inflows totaled $230 billion last year and are currently running at an annual rate of $500 billion. Compare those figures with an average of $42 billion per year from 1990 to 1997, and you can understand how some might think that foreign inflows are at unsustainable levels, if only because those levels are without historical precedent.

That makes sense to Cliggott.

"We can't continue to keep these foreign inflows at this level," he says. "There are several secular things that are driving it, like flexible labor markets and the ability of the U.S. economy to digest new technology. But we also suspect there's a cyclical nature to it."

The $500 billion question, of course, is: How much of these foreign inflows is cyclical? "I don't know," Cliggott admits, "but I've got to believe the cyclical component isn't zero. So we'd expect that some time in the near term -- between one and six months -- we'll start to see some pressure on the dollar and U.S. equities."

Accordingly, Cliggott said that in contrast to last year, when he would have thought it was wise to overweight U.S. stocks on a world-market-capitalization basis, lately he's been recommending that investors either market-weight or underweight them. (U.S. equities account for about 50.4% of the world market capitalization. "Market-weighting" them, for example, entails matching that proportion in a portfolio.)

'Incomparable to Any Other Period'

Not everyone thinks that what goes up must come down so quickly.

"I think that's dead wrong, the assumption that foreign money can't keep coming in," says Jeffrey Applegate, chief investment strategist at

Lehman Brothers

. "This

period is incomparable to any other period. Strategic M&A is increasingly cross-border. The

DaimlerChryslers

(DCX)

and

Deutsche Banks

are just the beginning."

Across the pond in London, Lehman equity strategist Joe Rooney backs Applegate up on that account: "In general terms, European companies are trying to broaden out their U.S. exposure ... that means building a global presence and global production."

One way of telling where money is flowing is to simply look at the performances of equity indices around the world. Rooney acknowledges that, just judging by the

Nikkei's

28.6% gains year-to-date, there has certainly been a significant relocation of money to Japan. But that's an old story -- those very gains are a good reason not to fear continued outperformance in Tokyo, he says. "I'd argue that it would be difficult to pick up from those levels." Rooney says that Lehman hasn't changed its global asset allocation since March, and that "there's nothing on the radar" to indicate that happening in the near future.

Somewhere in between Lehman and J.P. Morgan stands

Salomon Smith Barney's

global brokerage business. Leila Heckman, managing director of global asset allocation in Solly's research department, says that she started recommending in August that her customers overweight Japan, though no changes have been made to Salomon's weighting for U.S. stocks. (For the past few years, however, Salomon has had the U.S. modestly underweighted, at 48.8%, according to Heckman.)

But even Heckman has her doubts about whether Solly's asset-allocation revisions will be predictive of future money flows: "This August is the first month we've gone overweight Japan, mainly based on the upward revisions of GDP, company earnings and strong price momentum," she says. "But when you start overweighting countries based on momentum, things can switch relatively quickly. If the

Japanese recovery doesn't happen, things can reverse."