o what else could go wrong?
That is the question on many investors' minds as they assess what is keeping the stock market in the doldrums, despite positive outlooks for the economy, inflation and corporate earnings.
What appears to be holding the market back are more intangible concerns, including fears of another terrorist attack, distrust of corporate executives and worries about the accountants who have been reviewing their books.
Now add to that list of fears a potential plunge in the value of the dollar.
Since its high for the year at the end of January, the dollar has fallen 9.4 percent against the euro. The dollar is down 7 percent against the Japanese yen since its 2002 high in early February. So far, the decline has been orderly.
But Stephen S. Roach, chief economist at Morgan Stanley, says the chance of a dollar plunge has grown recently to a 15 percent probability from 5 percent. While the odds are low, the impact should be considered.
The dollar, by Morgan Stanley's calculation, is overvalued by 14 percent. It is also threatened by the United States' large current account deficit, including international trade. Covering this deficit requires a rising inflow of foreign capital. This means a slowdown in foreign capital inflow would weaken the dollar.
The return of federal budget deficits in the United States and hints of protectionism, especially tariffs on foreign steel imports, "hardly instill confidence in the dollar as the mainstay of global commerce," Mr. Roach wrote in his recent report.
Mr. Roach defines a plunge in the dollar as a decline of 20 percent or more in its value against the euro and the Japanese yen by the end of this year. Based on a starting date of May 24, that would put the dollar/euro rate at $1.15 and the dollar/yen rate at 100 yen to the dollar. In late trading Tuesday, the euro was worth 94.82 cents and there were 125.32 yen to the dollar.
In theory, an orderly fall of the dollar should provide offsetting pluses and minuses for the United States, Europe and Japan, minimizing the negative impact globally. The stronger euro and yen would make imports from Europe and Japan more expensive, while American goods would be less expensive for foreigners. With imports to the United States costing more, inflationary pressure here would be greater. But that pressure would ease in Europe and Japan as the cost of imported goods, including oil, declined.
"Export growth would be restrained in Europe and Japan, while foreign demand for U.S.-made goods would be stimulated," Mr. Roach wrote. "Inflation would be a little higher in the United States, but lower in Euroland and Japan."
But a rapid decline in the dollar would be negative, in part because it would erode confidence in the United States. The biggest impact, Mr. Roach said, would be on financial markets, with declines in stock and bond prices and higher interest rates here.
The fall in the stocks and bonds on Wall Street would be fueled by foreign investors pulling out of the American financial markets and American investors looking abroad to take advantage of a weaker dollar. The dollar could also be pushed lower if central banks around the world, which hold 76 percent of their official currency reserves in dollar-denominated assets, decided to diversify into the euro and the yen.
All this could lead to a "devastating blow to consumer confidence" in the United States, cutting into the spending that helped cushion the decline in last year's recession and has helped the economy rebound this year. Such a blow to consumer confidence, Mr. Roach said, would "stoke renewed fears of a double-dip" recession.
The impact of a dollar plunge would also be negative in Europe and Japan, possibly knocking as much as one percentage point off growth in Euroland and half a percentage point off growth in Japan. Stocks would also suffer.
"If the world's growth engine gets hit by a currency-related wealth shock, the global reverberations would come at a fast and furious pace," Mr. Roach said.