Over a span of a half-dozen years, the dollar has taken a tumble of about 35 percent, leading to many assumptions. Among them: It’s bad news for American tourists abroad but good news for exporters.
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But the relationship is far more complicated than that. In the global economy, there are so many factors at play that it isn’t possible to declare that a weak dollar is either mostly good or mostly bad. Analysts also worry that any lift to our economy may not be sustainable.
“The fact that the U.S. must now rely on a cheaper dollar to restart its ailing economic base is comparable to automakers having to offer significant price discounts to move their least attractive products out of dealers’ lots,” said economist Scott Anderson of Wells Fargo & Co. in a note to clients.
On Monday, the dollar fell to record lows against the euro and a 47-year low against the Canadian dollar, as the world looked with some skepticism at the U.S. economy and expectations grew that the Federal Reserve would call for another interest rate cut this week.
Some of the repercussions from a weak dollar include an assumed bounce in U.S. stock prices, since the buying power of foreign investors is greater. There is also a presumed relationship between the weak dollar and higher oil prices.
For Chicago-area companies, the financial penalty imposed by the nation’s struggling currency can be significant.
For instance, Kraft Foods Inc. said Monday that since agreeing in July to buy the cooking and cereal business of French food company Groupe Danone SA, the cost of the acquisition has increased $450 million, to $7.65 billion, because the deal was negotiated in euros.
“There is no such thing as a free lunch when a currency loses value,” said Robert Dederick of RGD Economics. “It simply means things will cost you more on a worldwide basis.”
Exporters benefit
At the same time, however, the lower value of the dollar is providing “a direct, black-and-white boost for the bottom line for numerous Chicago-area companies,” said economist William Hummer of Wayne Hummer Investments.
The list of winners includes Boeing Co., McDonald’s, Deere, Caterpillar, Illinois Tool Works, Abbott Laboratories and others, he said. All are behemoths that sell billions of dollars in goods outside this country. They find their profits from overseas burgeoning.
On Monday, oil hit a record of $93.80 a barrel, and gold hit the highest level since 1980, with much of the blame being placed on the greenback. Oil is priced in dollars, and it is generally seen that a weaker dollar leads to higher oil prices.
The currency’s retreat comes at a bad time for the economy, which has weakened to a point where the Federal Reserve is expected to lower interest rates on Wednesday in a bid to stave off a recession.
“The dollar has rarely been more than a peripheral factor and won’t be the focus of policymakers’ deliberations,” said Hummer.
He said the weak dollar means that “Americans are taking fewer trips abroad and will hold back on buying foreign goods. But that’s the way it’s supposed to work.”
The sliding dollar should make European goods, from Braun electric shavers to Volkswagen cars, more expensive for U.S. buyers, but in the global economy not all goods bearing European names are made there. More than half the Volkswagens sold in the U.S., for example, are built in Mexico and are treated as domestic vehicles under the North American Free Trade Agreement.
“When their manufacturing is dispersed, that serves as a bit of a buffer” against currency fluctuations, said Deborah Lucas, a finance professor at Northwestern University’s Kellogg School of Management.
Holding the line
European manufacturers have tried to absorb some of the dollar’s decline, “but when you see a substantial devaluation such as this, it’s hard to eat the entire cost,” said economist Carl Tannenbaum of LaSalle Bank.
He said central bankers in Europe and Canada expect growth to slow somewhat in 2008 because of diminished sales prospects in this country.
Meanwhile, the boom in exports is adding substantially to U.S. gross domestic product, Tannenbaum said, “and this will be the first time in 12 years that our trade deficit shrinks.”
BMW is the most popular European car brand in the U.S. and the largest importer, but spokesman Jan Ehlen said it has not raised prices in response to the falling dollar. Part of the reason: Its rivals include Japanese brands Lexus and Infiniti, whose prices have not been affected because of a weak Japanese yen.
“It’s all about having the right prices in the market. We are following a long-term approach in the U.S. to maintain competitive pricing,” Ehlen said. “We are not planning any short-term changes in our pricing.
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BMW also will expand its Spartanburg, S.C., assembly plant over the next few years to build 240,000 vehicles annually, up from 160,000.
Another reason European products may not jump in price is because what goes down may bounce back up, Lucas said.
“The current dollar value probably is not sustainable. I think the dollar is undervalued at present, so it will strengthen,” Lucas said, to what she termed “a more reasonable exchange rate” that gives the currencies similar buying power.
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