Jan. 25 (Bloomberg) -- U.S. stocks are vulnerable to a decline in the dollar because it would weaken corporate earnings and ``really blow up'' the market's four-year rally, billionaire investor Carl Icahn said.

``A lot of these earnings are because these companies are able to buy a lot of goods cheaply abroad,'' Icahn, 70, said in an interview yesterday in New York. ``If the dollar starts falling, this thing could really blow up.''

The manager of hedge funds, private equity and real estate assets also said Federated Department Stores Inc., in which he holds a 0.4 percent stake, would make a possible a leveraged buyout candidate.

The Standard & Poor's 500 Index rose to its highest in more than six years Wednesday after better-than-estimated earnings at Yahoo! Inc. and Sun Microsystems Inc. revived confidence in technology companies. The S&P 500 climbed 12.14, or 0.9 percent, to 1440.13. The dollar has slipped 3.5 percent in the past year against six major currencies.

Federal Reserve officials this month said they were confident that the economy would weather the housing slump and showed few signs they would relax their concerns about inflation. The central bank's Federal Open Market Committee has kept its benchmark interest rate at 5.25 percent since August after 17 straight increases, counting on the slowdown in growth in the second half of 2006 to contain prices.

Icahn built his reputation in the 1980s as a corporate raider, targeting big companies including Phillips Petroleum Co., Texaco Inc. and Trans World Airlines Inc. More recently, he failed to force a breakup of New York-based Time Warner Inc., the world's largest media company.

`Kept His Word'

He said he's happy with the company's performance, including Chief Executive Officer Richard Parsons's cost-cutting efforts in recent months. Parsons last year promised to cut $1 billion in expenses over two years as part of an agreement to end a proxy battle with Icahn.

Time Warner shares have gained 30 percent in the past year.

``I'm happy with it,'' Icahn said. ``Dick Parsons kept his word. He's been up to the office a few times. We shook hands. He cut costs, he did the buyback.''

His latest targets include Temple-Inland Inc., the Austin, Texas-based real estate developer and maker of forest products. Temple-Inland shares rose the most in almost two years Tuesday after Icahn acquired a 6.7 percent stake.

``We think the sum of the parts is worth a lot more than the whole,'' he said. ``If you might think about breaking it up, the timber assets could be very good.''

Activist

Icahn's approach to what he calls ``activist'' investing includes gaining control of companies and hiring new executives, or acquiring stakes and pushing management to make changes that will boost their stock prices.

Icahn entered the hedge-fund business in 2004, when he founded New York-based Icahn Partners LP, which grew to more than $3 billion in assets in two years. It now has $4.5 billion under management, Icahn said. He started pushing for changes at Time Warner less than a year after starting the fund.

Hedge funds typically are private, unregistered pools of capital that allow managers to participate substantially in gains on money invested. Fund assets worldwide have more than doubled in five years to $1.43 trillion, according to Chicago-based Hedge Fund Research Inc.

Buyout Boom

Icahn's American Real Estate Partners LP, founded in 1987 and based in Mount Kisco, New York, owns four Nevada casinos, rental houses, property slated for residential development and home-fashion manufacturer WestPoint Stevens Inc. Icahn owns 90 percent of the company's outstanding shares, according to a regulatory filing this month.

He started investing in oil and gas in the early 1990s. In September, he agreed to sell the oil and natural-gas unit of American Real Estate to Riata Energy Inc. for $1.52 billion, 10 times what he had paid for the business three years ago.

The current buyout boom in part reflects excess spending at many companies, Icahn said. Buyout firms raised $401 billion worldwide in 2006, according to data compiled by London-based research firm Private Equity Intelligence Ltd. The influx of cash is fueling takeovers, with a record $700 billion of buyouts announced last year, according to data compiled by Bloomberg.

Federated

``I look at us as almost buying wholesale,'' Icahn said. ``I think there's still a great deal of value in these companies. You buy these companies, you really clean up management.''

In many cases, companies taken private cut costs by 20 percent or 30 percent, he said. ``You wonder why the heck the current management couldn't do that.''

Potential buyout targets include Federated, the second- largest U.S. department-store company, Icahn said. Cincinnati- based Federated bought competitor May Department Stores Co. in 2005 for $11 billion and converted about 400 former May stores in September.

``I'm one of these believers in the merger with May,'' said Icahn, who owned 2 million Federated shares as of Sept. 30. ``I think it's going to work.''

``You could go in, if you wanted to do an LBO, and borrow against the real estate assets,'' he said of Federated.

He said he has spoken with Terry Lundgren, Federated's chairman and chief executive officer. ``We've had discussions,'' Icahn said, declining to elaborate.

Jim Sluzewski, Federated's vice president of corporate communications, couldn't immediately be reached for comment at his office after regular business hours.

To contact the reporters on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net; Greg Miles in New York at gmiles1@bloomberg.net.

Last Updated: January 25, 2007 00:11 EST