Richard W. Stevenson :
© 2001 New York Times, July 9, 2001
Strong Dollar Clouds Prospects for Rebound
(Foreign Demand for U.S. Products Drops)
WASHINGTON More than six months after the Federal
Reserve Board began battling to reverse the economic slowdown
in the United States, economists and business executives say an
unexpected rise in the value of the dollar is complicating the
prospects for a rebound.
Despite six interest-rate cuts by the Fed this year - an effort that
would typically be expected to weaken the dollar - the currency
has strengthened against the world's two other major currencies,
the euro and the yen. As a result, American products have
become more expensive abroad.
At the same time, economic growth appears to be slowing in
Europe, and Japan is again flirting with recession. That weakness
is further harming demand from abroad for American goods and
services, making it even harder for the American economy to
emerge from its doldrums.
"The global slowdown that's becoming more visible in the
economies of our trading partners and the surprisingly strong dollar
are going to be a drag on the recovery," said James Glassman, an
economist at J.P. Morgan in New York.
In the past few weeks alone, several prominent companies -
including Du Pont Co., Minnesota Mining Manufacturing Co.,
Coca-Cola Co. and Nike Inc. - have cited the strong dollar in
explaining profit shortfalls or reductions in their earnings
expectations.
Traditionally, by this point in an economic cycle, a weakening
currency would make American goods less expensive in foreign
markets, helping offset the slump at home by bolstering demand
from abroad and elevating corporate profits.
But with the dollar having risen this year rather than fallen, many
companies based in the United States are reporting disappointing
international sales or are failing to meet profit targets because
money they earn in foreign currencies brings less when translated
into dollars.
On Friday, the dollar stood at ¥125.98 in late New York trading,
compared with ¥114 just before the Fed started cutting interest
rates in January - making a rise in the dollar's value of 10.5
percent.
Similarly, it cost 84.70 U.S. cents to buy a euro late on Friday,
compared with about 94 cents in early January, a change of 10.6
percent.
Complaints from exporters about the dollar are a staple of
economic policy debates. And a strong currency has numerous
benefits, including helping to restrain inflation by making imports
less expensive - not to mention making foreign travel less
expensive.
Moreover, the overall outlook for the economy is generally more
affected by domestic factors such as consumer confidence and
spending by businesses on technology and other equipment than
by international developments.
But in this case, the squeeze on exporters from the dollar is
combining with weak demand from slumping economies at home
and abroad to put particularly intense pressure on American
manufacturers, which have borne the brunt of the slowdown. In
response, industrial companies have laid off hundreds of thousands
of workers and have been the main contributors to the rise in the
unemployment rate, which reached 4.5 percent last month, up
from a low of 3.9 percent in October.
"For large manufacturing corporations," said Jerry Jasinowski,
president of the National Association of Manufacturers, "the
impact of the high dollar and slower growth abroad is the No. 1
problem they have to deal with."
It is not just big companies that have been hit. Electron Energy
Corp. of Landisville, Pennsylvania, makes magnets that are used in
radar and satellite communications equipment. It has only 100
employees, but it has customers all over the world.
With the dollar so strong, said Michael Walmer, the company's
president, sales in Germany and France are down by 30 percent.
"It's a great time to travel there," Mr. Walmer said, "but I'd rather
have it be a great time to sell our products."
The faltering world economy was a primary topic of discussion for
finance ministers from the seven leading industrial democracies
when they met on Saturday in Rome. But the secretary of the U.S.
Treasury, Paul O'Neill, and his counterparts from Britain, Canada,
France, Germany, Italy and Japan did not take any coordinated,
concrete steps to stimulate renewed growth or to weaken the
American currency.
The dollar's rise this year, especially against the euro, has surprised
many analysts. But it appears to reflect nothing more than a
continued belief by investors and executives that America offers a
better climate for investment than anywhere else.
Even when the stock market has stalled, when companies are
scaling back on capital spending and America is struggling to avert
a recession by reducing interest rates, economists said international
investors still tended to prefer holding dollars or property in the
United States over buying stocks and bonds or factories in Europe
or Asia. This is especially true when, as now, the economies of
other countries are faltering.
"Foreigners know that if the United States is in trouble, then their
own countries will be in worse trouble, because the U.S. is the
global engine of growth," said James Paulsen, chief investment
officer at Wells Capital Management. "Holding dollars is the safest
place to be. It's hampering the Fed's efforts to restart the U.S.
economy."