That's an interesting point, but I think this point tends to be overemphasized. When you think about it, what good will it do anyone to have yen or euros in their pockets if the world's largest, most affluent consumer base is under duress? I think any savvy investor will realize that the rest of the world would be impacted by a terrorist attack on the U.S. far more than the U.S. would be impacted itself.
As I look at all of the indicators I see a declining stock market and a declining dollar, but a robust real estate market and unemployment rates that are the envy of the world. Maybe I'm wrong, but it seems to me that the rest of the world is telling us that our government is sh!t and our major corporations are sh!t, but our nation is still very strong.
Its really weird, but I'm afraid that too many people have a very short memory. We are pretty close to where we were, what, a couple of years ago as far as foreign exchange is concerned. That is certainly not the end of the world.
Foreign investors are pulling out a bit, but not due to faith or lack of faith in the US. They are pretty big into the stock market as well as T-bonds. Basically, the US money and stock markets have attracted tons of foreign investment and that has been what has sustained the dollar v. other currencies.
I really think that the rest of the world is basically putting their money where they think it will do the best, just like any other investor.
BTW, a devalued dollar isn't the end of the world; it makes US manufacturing cheaper as compared to foreign manufacturing. IOW, it might improve the trade balance a bit.