Although a dollar crash is unlikely anytime soon, a Federal Reserve study says any collapse in the value of the currency is unlikely to hurt the US economy. But few analysts agree.
Instead, many economists suggest an abrupt decline in the dollar's value would cause pandemonium in both US credit and equity markets.
To maintain foreign interest in US financial markets and prevent large investment outflows, which would disrupt the economy, the central bank would begin raising short-term rates aggressively, analysts say.
But rising short-term rates alone would choke US economic growth as American consumers would be inclined both to save more and borrow less. Since the US buys goods from around the globe, analysts emphasise the spillover would be worldwide.
"A dollar collapse would hurt everyone - in the US and around the world," said Joe Quinlan, managing director and chief market strategist with Bank of America Capital Management.
"It would force the hand of Europe, Japan and Asia and force these nations to undergo consumption-led growth, a dynamic they have long resisted."
As US consumers stop buying, it would also disrupt the established pattern of US consumption being financed by the countries, particularly China and Japan, that actually produce those goods.
Since most of the dollars collected by those countries are used to buy Treasuries, the US bond market could suffer a sharp sell-off that would push rates up in the long end of the yield curve as well, analysts say.
The Fed though, is at odds with the thinking on the street, according to its recent report.
"Currency crashes do not generally lead to higher bond yields in industrial countries," the study said. "Indeed, over the past 20 years, currency crashes in industrial countries have always been followed by falling bond yields."
While Joseph Gagnon, assistant director of the Fed's Division of International Finance, notes in the study that currency crashes in the 1990s in Mexico and East Asia did push long-term rates up to debilitating levels, he added that rich countries appear better able to deal with the threat because of the inflation-fighting credibility of their central banks.
Mr Gagnon found the change in bond yields after a currency crash was strongly linked to the level and change in inflation after the crash.
The US experience since 1970 has been limited to just one dollar crash, in 1985-86, Gagnon said. In that time, the US bond yield dropped more than four percentage points, counter to what Wall Street would anticipate.
Investors though, are not convinced.
"The Fed's study is flawed as the comparisons are not relevant," said Peter Schiff, chief global strategist with Euro Pacific Capital, Inc. "When the world dumps dollars, they will also dump Treasuries, sending rates soaring."
Mr Schiff, who is bearish about prospects for the dollar, says the most interesting thing about this study is not its "ridiculous conclusion," but the fact it was even done.
"If the Fed is studying the effects of a dollar collapse, they must actually believe that one is possible," he said.
To be sure, others who differ with the Fed over what would happen if the greenback were suddenly to fall are not necessarily expecting it to happen.
"I'm not in the dollar collapse camp - US assets remain among the most attractive in the world assuming no more US-led wars, no US protectionism and the continued outperformance of the US economy relative to Europe and Japan," said Bank of America's Quinlan.
Anthony Chan, Columbus, Ohio-based managing director and senior economist at JP Morgan Asset Management, agreed with Quinlan.
"A decline in the value of the dollar sometimes spooks foreign investors, in both equities and fixed income, since they now have to incorporate a currency loss into their investment equations," he said.
"Although this only comes into play when the decline in the value of the dollar is abrupt and significant - a small orderly decline is not likely to incite such a negative response."