Just having a slide in GM stock would not have much in the way of implications for the dollar. Where the problem arises is in the bond market, where GM, along with Ford and GE, is one of the biggest issuers of debt.
GM's debt is now rated just one level away from junk. If it gets rerated down, as Barron's noted this week, the effect on the bond market would be unpleasant:
A GM downgrade to junk status would have huge repercussions, because the company would be expelled from the investment-grade indexes and placed into the high-yield market-which is deemed to be a separate asset class. Many institutions are prohibited from holding sub-investment-grade credits. A cut in GM's rating to double-B territory could be a tripwire that might set off massive selling of one of the corporate market's biggest, most widely-held names.
Greg Peters, the head of US credit strategy at Morgan Stanley, astutely observes that less than two months ago, the credit markets rallied strongly as Fitch Ratings, perceived as a GM-friendly rating agency, was included in the Lehman Credit Index...But on Wednesday, Fitch downgraded GM to triple-B minus, only one notch above junk, and left a negative outlook on the company's debt.
There's actually two ways this could cut: it could be neutral to positive for the dollar if safe-haven buying of US Treasuries results, or it could be negative for the dollar if the pain that foreign holders of GM debt feel, coming on top of losses from the dollar's decline, makes them give up on US assets. This result could occur because of a general perception of risk increasing in the marketplace, in which case repatriation to one's native currency is one perfectly logical way of reducing risk, as you eliminate currency risk from your portfolio.
In this regard, collounsbury had a prescient post a short while back: Credit, Credit, Credit