U.S. Dollar Has Its Best Year in 17
By Geraldine Ryerson-Cruz
New York, July 13 (Bloomberg) -- The dollar is having its best year in 17 against the world's major currencies, rising or holding steady against all but three -- the Mexican peso, Peruvian new sol and Lebanese pound.
It's ``the currency of choice for global investors,'' even as the U.S. economy cools and stocks decline, said Neil MacKinnon, senior currency strategist at Merrill Lynch & Co. in London. The dollar ``is still top dog, almost by default.''
Many investors are betting the world's largest economy, while slowing, will still outperform Europe and Japan. Their purchases of U.S. stocks and other financial assets helped the dollar rise or hold its ground against 52 of 55 major currencies this year. Not since 1984, when only Taiwan's currency managed a gain by this point in the year, has the dollar fared as well.
While the gains help finance the U.S. trade gap and ease inflation pressure, not everyone is pleased. U.S. exporters such as Nike Inc. and Minnesota Mining & Manufacturing Co. complain the strong dollar dilutes their foreign earnings when they bring home profits, and central banks in countries such as Brazil and Taiwan have begun intervening in the foreign-exchange market to try to protect the value of their own currencies.
Optimism that the Federal Reserve's six interest-rate reductions this year will reignite the economy has propelled the dollar's gains, analysts said. Fed policy makers lowered overnight borrowing costs by a total of 275 basis points this year, to 3.75 percent, the lowest rate since 1994.
Manufacturers Complain
So far this year, the dollar rose 10.5 percent against the euro to 85.35 cents per euro, 8.2 percent against the yen to 123.78 yen, and 6 percent against the British pound to $1.4074 per pound. The currency gained 9.7 percent against a basket that includes those currencies as well as the Swiss franc, Swedish krona and Canadian dollar, reaching a 15-year high last week.
Some companies caution that climb may be too much for the economy's good.
The gains prompted U.S. manufacturers last month to press Treasury Secretary Paul O'Neill to back away from the policy of supporting a strong dollar, arguing that it's made them less competitive abroad.
Jerry Jasinowski, president of the National Association of Manufacturers, said the dollar's 27 percent trade-weighted gain since 1997 is undermining the economy and is responsible for declines in manufacturing.
Nike Inc., the world's biggest athletic-shoe maker, warned that fiscal year 2002 profit will fall because of the dollar's strength, particularly against the euro.
``Higher product costs and the translation of European profits into fewer dollars'' cost Nike 33 cents a share in fiscal 2001, which ended May 31, the company's Chief Financial Officer, Donald Blair, told investors last month. ``The dollar impact will be larger'' in the June-August period, he said.
Policy Change Unlikely
Companies including Procter & Gamble Co., Coca-Cola Co., Abbott Laboratories, and H.J. Heinz Co. have said in recent weeks that the strong dollar hurt their earnings in the second quarter.
Bank of England Governor Edward George on Monday fueled such concern when he said a strong dollar has a ``negative effect on (the) U.S. economy through trade accounts,'' and is boosting inflation in the euro region.
Still, ``I don't think Washington is going to do a whole lot'' in terms of changing foreign-exchange policy or statements, said Mark Thome, a vice president of foreign exchange at Fortis Financial Markets. ``It's highly unlikely.''
Any sign the administration is backing away from its view on the currency could roil confidence in U.S. financial assets, strategists said.
Mergers and Acquisitions
In the meantime, foreign direct investment for mergers and acquisitions has helped power the U.S. currency higher. So far this year, about $33 billion came from the 12 nations sharing the euro to buy U.S. companies, compared with $20 billion leaving the U.S. for euro-zone purchases, for a $13 billion net inflow. In 2000, a net $134 billion came from euro-zone countries for acquisitions in the U.S.
Companies ``have the freedom to come into the U.S. and buy companies if they wish, so they do,'' rather than wade through prohibitive regulation in Europe, said Fortis's Thome.
While the dollar strengthened or remained unchanged against 52 of 55 major currencies, the euro has performed as well against just 11 and the yen against 17.
``It's only the U.S. that's moving to head off the weakness in growth with progressive Fed easing in rate cuts'' to such a degree, said Jay Bryson, an international economist at First Union Corp. in Charlotte.
While interest-rate cuts pare returns on deposits in the currency, which can weaken demand, traders and investors have instead focused on optimism that lower borrowing costs will bolster corporate profits and U.S. asset markets.
The European Central Bank lowered its benchmark lending rate just once this year, to 4.5 percent on May 10, and the Bank of Japan's benchmark rate has hovered near zero percent since March.
Faith in Fed
``The reason the dollar's been strong is that global investors have considerable faith in the ability of the Federal Reserve to deliver the goods'' and get the economy back on track, said MacKinnon at Merrill Lynch. ``Many investors take the view if the U.S. is going to have a bumpy ride you can bet everyone else is too, and perhaps to a worse degree.''
Mounting concern about currency stability and economic growth in emerging-market economies has also bolstered demand for dollars, analysts say. Central banks in countries including Brazil and Taiwan have tried to mitigate the effects.
Brazil's real, the second-worst performing currency, fell 23.5 percent since the year began, amid efforts by the central bank to buy it on it in the market and shore up demand. Brazil's central bank said last week it would sell $6 billion spread out evenly over the rest of the year to prop up the real.
Worst Performers
The worst-performing currency this year is the Turkish lira, tumbling almost 50 percent this year since Turkey's government stopped trying to prop up the currency and let it float against the dollar on Feb. 22.
Another seven currencies have also fallen by more than 10 percent against the dollar this year. Sweden's central bank intervened to buy the krona last month, and raised interest rates last week as the currency sagged 13 percent against the dollar.
Traders also said in recent weeks that the central banks of Taiwan and the Philippines had intervened to support their currencies. Singapore's central bank, the Monetary Authority of Singapore, bought the island's currency in May to stem its drop.
The effects of those efforts are likely to be limited, said analysts.
For the currencies of emerging nations, the question is, ``are people investing in your country or not?'' said Thome at Fortis. ``When things are going well, people put money in these countries, but when the global economy starts to weaken, money moves out and the currencies get hit very hard very quickly.''
International investment flows spared the Mexican peso from similar declines, making it the best performing currency this year with a 2.8 percent gain against the dollar. Foreign companies are seen investing close to $18 billion in Mexico this year, the most ever, as inflation fell to its lowest rate in almost 29 years. |
