"I’ve been getting calls from guys all over Wall Street asking how it would work,” Auerbach said. He declined to quantify the portfolio losses investors could face on the conversions, but said some foreign assets wouldn’t be affected since they’re denominated in U.S. dollars already.
Critics say the expectation that the dollar will rise exactly in line with the cost of higher prices for imported goods doesn’t account for other factors that can influence currency exchange rates, including interest rates and political shifts. Currency fluctuations are “a jigsaw puzzle” that can’t be easily modeled, said Henrietta Treyz, a macroeconomic policy analyst at Height Securities LLC.
A stronger dollar might prompt emerging-market countries to raise their interest rates, making it more expensive still for U.S. investors to swap foreign-denominated assets into dollars, said Ben Emons, the chief economist at wealth management firm Intellectus Partners and a former portfolio manager at Pacific Investment Management Co. Some markets might already be anticipating those higher costs, he said.
Export-heavy companies would benefit from a border-adjusted tax -- but so might another group: foreigners who hold U.S. assets. For them, the stronger dollar would yield more of their own nation’s currency when they convert income from their U.S. assets, economists say.
People in foreign countries held $17.1 trillion of U.S. assets as of June 30, 2015, according to Treasury data.
Border adjustments would produce a wealth transfer to them -- courtesy of American holders of foreign assets, said Alan Viard, a resident scholar at the American Enterprise Institute and a former senior economist at the Federal Reserve Bank of Dallas. Viard had supported the proposal, but now says he’s on the fence.
"It’s almost like a foreign aid program, a giveaway of wealth to foreigners," said Viard.
This article was provided by Bloomberg News.