Why is Exxon-Mobil still sitting on that $30 Billion Dollar hoarde of cash?
Another perspective excerpted from Up and Down Wall Street, Barrons 5/8/06
emphasis mine
BACK IN THE GOOD, OLD U.S. OF A., we love our cheap dollar the way Homer Simpson loves cheap beer. And why not? As the greenback has given back about half of its 2005 gains, the Dow Jones industrials have been heading steadily higher, adding 1.9% last week to 11,577.74, within 150 points of its record close back in January 2000. And according to Joseph Quinlan, Bank of America's chief market strategist, the two aren't unrelated.
Notwithstanding the fretting about the declining dollar boosting imported inflation and repelling foreign investment, Quinlan writes that the worrywarts' fears are overblown. Excluding energy (easier said than done), import price rises have been no big deal. He also doubts the dollar's slide will push up interest rates dramatically -- absent a rise in protectionism. "On balance, U.S. assets remain among the most desirable in the world, a function of strong economic growth in the U.S. and foreign investor faith in U.S. institutions (notably the U.S. Federal Reserve)," Quinlan contends.
Indeed, he continues, there are four reasons to root for a weaker dollar. It will give a boost to exports, which are already booming, growing at a double-digit pace in 2005 and surging 11.8% in the first two months of 2006 from the year-earlier period. Quinlan points out U.S. exports averaged $100 billion per month; by contrast, other countries, such as India, don't export $100 billion in a year.
For investors, the weaker dollar will goose the earnings of U.S. corporations' foreign affiliates. The greenback's decline against the euro will give an especially nice fillip to the bottom line since about half of foreign income comes from Europe. The dollar's drop against the yen similarly helps given a quarter of U.S. foreign income comes from Japan. U.S. global earnings hit a record $223.8 billion while the dollar was rising in 2005, up 7% from the previous year. A drop in the dollar this year will sustain the boom in U.S. global profits.
The cheaper buck will reduce U.S. manufacturers' cost disadvantages compared with foreign competitors, Quinlan also contends. "If the bears are right, and the greenback is set to decline this year, then the dollar's fall could emerge as a powerful tailwind for Corporate America, and place the burden of corporate adjustment (downsizing, consolidation, outsourcing, etc.) on Europe, Japan and many other nations," he writes.
Finally, a weaker dollar will shift the burden for global growth from the voracious American consumer. The U.S. comprises 4.5% of the world's population but takes about 16% of the world's imports, resulting in the huge U.S. trade deficit. Shifting from export-led growth to increasing domestic demand in other countries would reduce the massive global imbalances.
"Given all of the above -- the prospects of stronger U.S. export growth, rising U.S. global earnings, a more competitive U.S. manufacturing base and an accelerating pace of global restructuring -- what's not to like about a cheaper U.S. dollar? From our vantage point, an orderly decline in the greenback (in the range of 10%-15% on a trade-weighted basis over the next year) would do wonders for Corporate America, the U.S. financial markets and the global economy."
And, as the stock market's performance demonstrates, there seems to be ample agreement that the cheaper dollar has been just the right tonic. It is also unlikely, however, that other nations will stand idly by and let the Yanks debase the currency used for most commercial and financial transactions and used for reserves by official institutions to gain this advantage.
China, for one, has resisted pressure to let the yuan appreciate. Japan and other Asian nations have tried to keep a cap on their currencies to maintain their export competitiveness. By contrast, the euro has risen sharply, both relative to the dollar and Asian currencies, but most euroland exports go to other European countries (Renaults and Fiats being sold in Germany, for example).
And Jean-Claude Trichet, the head of the European Central Bank, even hinted the ECB could raise its benchmark interest rate a half point in June instead of moving in quarter-point steps, which further boosted the euro. But at some point, the strength of the euro, which has lifted it 7.6% this year to $1.27, may begin to cause consternation, especially if, for instance, it results in Airbus losing some more big orders to Boeing.
David P. Goldman, Cantor Fitzgerald's global head of fixed-income research, also spies a less beneficial component in the dollar's dynamics of late. The greenback has fallen as crude oil prices have risen -- the opposite of what would be expected to happen -- implying that oil producers are diversifying their assets into non-dollar investments. And as the dollar has fallen, long-term U.S. interest rates have risen -- specifically the inflation premium embedded in bond yields, not real rates (which reflect economic strength).
For now, it seems we're getting to enjoy the pleasures of the dollar's decline, as it boosts U.S. corporate profits and stock prices. At some point, the loss of virtue will come back to haunt us as our reputation suffers, and ultimately our interest rates and inflation.
But other countries will resist the virtue of a strong currency being forced on them because they don't want to be the wallflower at the global party. That leaves only one currency that can't be compromised: gold, which Friday hit $686.50 an ounce for the nearby futures contract, up from $519 at the turn of the year. |
