A FALLING DOLLAR
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Some Lose, Some Win, Some Break Even
By DANIEL ALTMAN and SHERRI DAY
The New York Times
5/20/03
The dollar's plunge in value against the euro and other currencies has
captured the attention of the financial markets this week. But its effect on
the economy may boil down to a murky mix of pluses and minuses for
consumers, businesses and investors.
Consumers may face higher prices, but at a time when deflation is the more
dominant fear. Importers' margins may narrow, but exporters could reap the
benefits of newfound competitiveness. A disorganized unraveling of the
dollar might squeeze capital markets, but a controlled decline could help
the economy to perform better in the long term.
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"It's a very unusual confluence of events," concluded John K. Nelson, a
managing director in charge of global foreign exchange at ABN Amro Bank in
Chicago.
If the dollar fails to reverse its slide, consumers can expect to face
higher prices for a variety of imported goods and services. In some cases,
the importers themselves may also suffer.
Louis Vuitton North America, a subsidiary of the French luxury giant,
imports its high-end purses and bags from France and other parts of Europe
and then sells them in the United States. The company last raised prices on
its goods in February and will probably do so again if the euro continues to
appreciate, said Claus-Dietrich Lahrs, the president of Louis Vuitton North
America.
"We certainly have to buy them at more expensive rates than before," Mr.
Lahrs said of the leather bags and accessories his company sells. "From time
to time, the movement is too strong, and we adjust the prices here in the
United States."
On the other side of the dollar coin, some companies that do most of their
business abroad have not been above a little polite exulting in the changing
exchange rate. Heinz Krogner, chief executive for Europe at Esprit Holdings
(which is based in Hong Kong), said his company would save money on clothing
bought in Asia, where several currencies' values are linked to the dollar.
The competition, Mr. Krogner said, might fare worse. "For companies that buy
in the euro area - say American clothiers who buy their suits in Italy -
they got problems."
Some exporters are looking forward to becoming more competitive.
Diamond of California, a leading supplier of nuts, exports about 30 percent
of its production to Europe. "Most of that is a big produce business that we
do in the fall," said Michael J. Mendes, the company's chief executive. "If
the exchange rate remains at its current status, it's going to make us much,
much more competitive against our French and Italian competitors."
The Dole Food Company also exports from the United States, but much of its
produce originates in Latin America and elsewhere abroad - the same areas
where many European businesses buy. As a result, said Richard J. Dahl, the
company's chief financial officer, the positive effect of the change in
exchange rates was not huge. "You don't always see it come through in the
way you might expect," he said.
For some of the biggest American businesses, like the Coca-Cola Company,
though, the dollar's fluctuations may have little effect.
"It's important to note that you can't look at any one currency in isolation
and draw conclusions," said Ben Deutsch, a Coca-Cola spokesman.
"Given that we operate in more than 200 countries, we take a portfolio
approach to currency management and we must look at the overall basket of
currencies as we manage our business," Mr. Deutsch said.
In a conference call last month, the company's executives said that they
expected currency fluctuations to have a "slightly positive" effect on its
annual results.
The muted reaction was echoed at the clothing seller Perry Ellis
International, where executives are taking the long view.
"If this is an extended phenomenon for a couple of years it may have an
impact, but we haven't seen anything yet," said Timothy B. Page, the chief
financial officer. "The market's a difficult market right now for everybody.
This is just another factor that we all have to pay attention to."
For companies whose products are relatively inexpensive to make but
expensive to advertise and promote, the relative strength of various
currencies can cause gnat-like annoyances, but rarely have major strategic
impacts.
That is certainly true for the Alberto-Culver Company, a $2.65 billion
company based in Melrose Park, Ill. It makes and sells its own line of
shampoos, lotions and other personal-care products under brands including
St. Ives and Alberto VO5, but also handles professional distribution for
Procter & Gamble, Wella, L'Oréal and other manufacturers.
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"Our kind of business is not capital intensive, and the cost of our goods is
low," said Howard B. Bernick, the chief executive. "Our major investments
are not in bricks and mortar, but in marketing and promotion to grow our
brands. And those are things you do in local currencies."
In addition to making imports more expensive, a falling dollar can also
cause jumps in the prices of domestic goods and services. Companies that buy
raw materials from abroad may have to raise the prices on their final
products, and American businesses may gain pricing power as imports become
less competitive.
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In the 1980's, the prospect of higher prices worried the capital markets
when the dollar experienced a rapid depreciation, said Kermit L.
Schoenholtz, chief economist of Salomon Smith Barney. Investors then feared
that the Federal Reserve Board would have to raise interest rates while the
economy was performing well.
But this time, Mr. Schoenholtz said, the circumstances are extremely
different. With the threat of deflation receiving increasing attention, the
possibility of tighter credit seems a long way off.
"Here you have this sizable correction of the dollar, and capital markets
have behaved as if nothing has happened," Mr. Schoenholtz said.
That stock markets have remained fairly steady during the dollar's long
decline, notwithstanding yesterday's activity, may also hint that investors
see the depreciation as, on balance, a useful development.
Making American exports more attractive could provide a reasonable amount of
economic stimulus, said Mr. Nelson of ABN Amro. "The current administration
is under enormous pressure to reflate the U.S. economy, and doing that
through exports is not necessarily a bad strategy right now."
From a longer perspective, though, the falling dollar has still given
investors reason for pause. If the dollar's value stays low relative to
other currencies, in terms of what it can actually buy, returns on
investments in the United States will look less attractive. An unwillingness
of overseas investors to buy up in dollar-denominated assets could lead to
financing problems for American companies and the federal government.
"Certainly, for portfolio investors who might be putting their money in the
United States from abroad, it might be of some concern if they saw a
substantial period ahead of a declining dollar," said Charles H. Dallara,
managing director of the Institute of International Finance, a global
association of financial firms.
Mr. Dallara did not see cause for alarm yet, but Mr. Nelson was somewhat
less sanguine.
"The rate of decline and the political rhetoric we've been seeing will be
unsettling to people who are examining alternatives amongst U.S. dollar
assets," Mr. Nelson said. "The real issue isn't the exchange rate, it's the
uncertainty around the decline."
With more uncertainty surrounding the dollar, Mr. Nelson predicted, foreign
central banks would begin to consider diversifying their reserves away from
dollar-denominated assets and toward euro- and yen-denominated assets. In
that event, he said, "you're talking about billions and billions of dollars
being sold."
Some economists already see foreign governments' bonds as more attractive
than Treasury securities. Mr. Schoenholtz said he did not think Treasury
yields would continue to undercut yields on the bonds of governments in the
euro area. As a result, a bet on the prices of the German government's
bonds, for example, might offer better value for institutional investors
than a bet on Treasuries.
Mr. Dallara warned against taking the reversal in the dollar's fortunes as a
more general verdict on the economy, though.
"There is a tendency that we all have to look at the dollar first vis-à-vis
the headline exchange rates versus the euro and the yen," he said. "The fall
is nowhere near as substantial as it might appear, because there are a
number of major partners with which the U.S. trades - Canada, Mexico, in
Asia, around the world - where the exchange rate moves are more moderated." |
