Why falling dollar a concern?

Question

I heard Carl Icahn on Bloomberg say one of his biggest concerns to damage the stock market is the falling dollar but he did not elaborate. Do you know why this is a concern?

Answer 1

Eric is correct in the a falling dollar will make imports more expensive. Since the U.S. imports practically everything it consumes, higher import prices would be very inflationary for the U.S.

But regarding markets, the majority of investments in the U.S. is from foreign investors. For example, China owns $700 billion in US Dollar forex reserves and about $300 billion in US Treasury securities. Japan owns $750 billion in Treasuries and $680 billion on Dollar reserves. As the dollar falls in value, those foreign held dollar and dollar denominated assets are declining in value. For each penny the dollar drops in value, China is losing $7 billion in value in their forex reserves.

A continued decline in the dollar would prompt foreign nations to stop investing in U.S. dollar denominated assets. The U.S. has to borrow $2.4 billion per day to function and that money is coming primarily from foreign investments. If that spigot was turned off, the financial crisis that would follow would be catastrophic. Also, a continued drop in the dollar could prompt foreign governments to cut their losses and whole sale dump U.S. dollars and securities.

If the bond pit got hit with a $100 billion sell order from the BoJ (Bank of Japan) because their trying to cut losses in their treasury holdings, a sell order of that magnitude would collapse the bond market, which in turn would collapse the stock market. Interest rates would spike putting huge pressure on the housing market causing it to collapse. In addition, that would trigger credit defaults and the U.S. banking industry holds over $6 trillion in credit default swaps. Just 1 large enough default by a counter-party to the default swaps would trigger a domino effect that could and probably would collapse the entire U.S. banking industry. The ensuing collapse would put increased downward pressure on the dollar and thus eventually prompting the demise of the dollar and the dollar would cease to be the world's reserve currency. The last time there was a change in the world's reserve currency, there was a depression and a major war.

Imagine if you would, the dollar collapses, OPEC dumps dollar denominated oil sales and moves to the Euro (which OPEC is contemplating with the increasing weakness in the dollar). Countries holding dollar reserves to buy oil would dump their dollar reserves for Euro's pushing the Euro up and the dollar down. Oil prices in the U.S. would skyrocket. Oil could easily surpass $150 - $200 a barrel and prices at the pump could easily exceed $8-$10 per gallon.

If you can, pay attention to the U.S. Dollar Index (USDX). It's currently at 85; 80 is the demarcation line for a dollar collapse. Price action is pointing to a low on the USDX of 40. At that level, the dollar would cease to be the world's reserve currency and the economic landscape of the U.S. would change drastically.

Answer 2

It causes imports to be more expensive. It also puts us into greater debt to other nations (trade deficit).