Caution: Falling dollar
But weak currency's a boon to some area businesses
Friday, January 9, 2005
BY BRYCE G. HOFFMAN
News Business Reporter
Despite Friday's rally, many Americans - especially ones paying more for imported goods or for their trips overseas - are watching the U.S. dollar with concern. Over the past three years, the dollar has tumbled nearly 30 percent against several major currencies, including Europe's dominant currency, the euro.
Over the past few months, the decline has only picked up speed. The weak dollar, coupled with rising energy costs, even prompted the Federal Reserve's Open Market Committee to express concerns about the risks of inflation. Minutes from the group's December meeting show some officials are pushing to raise interest rates faster than originally planned to offset that threat.
Yet most area companies say they have suffered little negative impact from the currency's devaluation. In fact, many are benefiting from the weak dollar.
Automakers applaud
That is particularly true for Michigan's automakers.
"It's generally a good thing for the industry," said David E. Cole, chairman of the Ann Arbor-based Center for Automotive Research, a leading industry think tank.
A weak dollar inflates the price of imports, Cole said, making American cars and trucks more competitive in the marketplace.
Asian automakers have countered this to some degree by building more of their own cars and trucks in this country, he said. They also purchase foreign currency to mitigate fluctuations in the exchange rate. But Cole said the advantage to American carmakers is undeniable.
"They'd vote every time for a weak dollar," he said.
However, Cole said the decline of the dollar has been a mixed bag at best for Michigan's automotive suppliers.
While companies like Visteon Corp. stand to benefit from any gains won by domestic automakers over foreign competitors, they are also being squeezed by soaring raw materials prices which are often pegged to the dollar.
"There's just been wild inflation in commodities this year," Cole said.
Much of that is the product of the mathematics of supply and demand, but he said the decline of the dollar has made those price hikes even steeper. Nonetheless, Visteon says the benefits of a weak dollar still outweigh the negative impact it has on the company's raw materials costs.
"This has been somewhat offset by other currency fluctuations, as well as Visteon's hedging strategy, which aims to reduce profit volatility due to swings in exchange rates," said Visteon spokesman Jim Fisher. "Overall the net impact has been slightly positive."
Range of industries affected
Other area manufacturers report similar impacts on raw materials costs.
Ann Arbor Township-based Flint Ink Corp. is the world's largest privately held ink producer, with more than 100 facilities worldwide. Like many automotive suppliers, it is seeing the price of some raw materials rise as the dollar falls. But Flint Ink sells most of its products in the markets they are produced in. That gives the company "natural hedges" against currency fluctuations, according to Treasurer Jim Steel.
"For most of our operations, we're manufacturing locally and selling in that currency," he explained. Moreover, many of its operations that do export are in Europe, and Steel said those are benefiting from the strong euro.
Not everyone with European factories is as enthusiastic about the strength of the regional currency as Flint Ink.
Tecumseh Products Co., a global manufacturer of small engines and other industrial components headquartered in the town of the same name, says the weak dollar and strong euro are nothing but bad news for its bottom line.
"Our company is probably different than many U.S.-based companies that export," said Tecumseh's chief financial officer, James Nicholson. "The stronger the dollar, the better off we are."
That is because Tecumseh manufacturers most of its products overseas, but sells them in U.S. dollars.
"It is our European operations that are hurting the most," Nicholson said.
For example, its factory in Italy produces small engines and sells them to European companies that use them in products destined for the European market. Its chief competitor is another U.S. company, Briggs & Stratton Corp., which produces its engines in the United States and exports them to Europe. That makes it a lot harder for Tecumseh's Italian subsidiary to sell its engines, because the weak dollar makes those imported engines a lot cheaper.
"They've lost a lot of (market) share because of that," Nicholson said.
As a result, Tecumseh expects to shift much of its European production to its factories in low-labor-cost countries like Brazil and India, just as it has done in America over the past several years.
Like many companies, Tecumseh has tried to offset some of the impact of the declining dollar buy investing in foreign currency - a practice known as hedging.
"That's only effective if you hedged before significant devaluation," Nicholson said. "We had taken some action, but not enough."
The company is also looking at ways to exploit natural hedges whenever possible. But Nicholson said there is little else Tecumseh can do at this point but ride out the storm.
Overall economy benefits
It will likely prove a long ride.
"This is going to be with us as an issue for a long time," CAR's Cole predicted.
And that is probably a good thing for the economy as a whole, according to Saul H. Hymans, the University of Michigan's top economic forecaster.
"It's going to take a long time to turn around a $600 billion current account deficit," he said, referring to the nation's trade deficit. "You want the dollar to be weak long enough to turn this thing around."
Hymans said some companies, like Tecumseh, will continue to suffer from the weak dollar, but he said the economy as a whole will likely benefit.
That is, unless the dollar declines too rapidly. Right now, the dollar is declining in what Hymans describes as "an orderly way." But some countries, like Russia, are considering replacing significant portions of their dollar reserves with the stronger euro - a move that could trigger a more precipitous decline.
While most domestic manufacturers would continue to benefit, Hymans said a sharp decline could disrupt foreign investment in the United States, which would, in turn, play havoc with the financial markets.
"That's the risk," he said. "It's a small risk, but it's a risk."
Bryce G. Hoffman can be reached at bhoffman@annarbornews.com or at (734) 994-6932.
© 2005 Ann Arbor News. Used with permission
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