U.S. Travelers, Exporters Feeling Effects of Dollar’s New Strength
The dollar, until last month the 98-pound weakling of the world’s major currencies, has unpredictably recouped all its substantial losses of the past year against the once-mighty German mark.
Before slipping slightly, the dollar shot up another three pfennigs Wednesday alone to nearly 1.72 marks, territory not reached since March, 1990. The dollar also gained ground, although not so much, against the Japanese yen, the world’s other major currency.
The causes of the dollar’s extraordinary rebound are many: signs of the end of the U.S. recession; weakening economies in Europe; the difficulties of economically unifying the two Germanys; even the quick and decisive allied victory in the Persian Gulf War.
More than that, the dollar’s purchasing power had fallen far below that of most other major currencies. A rebound seemed inevitable, eventually.
“I had expected an upturn,” said Nigel Gault of DRI-McGraw Hill in London, “although I can’t claim I had predicted the timing or the suddenness.”
The newly muscular dollar spells good news for Americans who travel abroad or have a taste for foreign goods. But paradoxically, it is not so good for many American businesses.
Exporters are losing some of their price advantage in competition with foreign manufacturers. Germans now will have to spend nearly 20% more marks to buy an American item whose price tag in dollars has not changed.
Moreover, uncertainty about the dollar’s prospects is gnawing at the plans laid by executives of many American-based multinational corporations.
Richard A. Stuckey, chief economist of Du Pont Co. in Wilmington, Del., is one.
Du Pont, which manufactures 40% of its products overseas, plans to boost that figure to 50% by the decade’s end. It is a plan based, in part, on the expectation that the dollar will gain value gradually, not meteorically .
“We’re not looking for the kind of volatility that we saw in the early 1980s,” when the dollar doubled in value, Stuckey said. “But it could happen. If it does, it will disrupt our plans.”
Like Du Pont, all big U.S. manufacturers are warily eyeing the dollar’s course. Allen Lenz, economics director of the Chemical Manufacturers Assn., said companies tend to move production abroad during times of currency volatility as a means of ensuring that at least some of their plants will be strategically located.
“Uncertainty always tends to increase investment abroad as a means of hedging your bets,” Lenz said. The development could spell long-term trouble for American workers.
Many economists are betting that the dollar, still inherently undervalued against many of the world’s other currencies, will continue to gather strength through 1991, although in the short term it could slide down from its present heady levels.
“The next month or so could be very dangerous to the dollar,” said J. Nicholas Robinson, European economics director for Chase Manhattan Bank in London. “But I see it going up in the three to four months after that.”
A somewhat contrary view attributes the suddenness of the dollar’s rebound to a rampant case of “herd psychology.”
“This is not to say the revaluation of the dollar was mistaken, only that it was too abrupt,” said Brendan Brown, an economist with Mitsubishi Finance International in London. He predicted that the dollar would retreat as investors realize they overreacted.
If this view is correct, American exporters have less to worry about.
Gordon Richards, an economist with the National Assn. of Manufacturers in Washington, thinks that it is. Richards said the dollar’s sudden rise had all the earmarks of a “speculative bubble” that would soon burst.
“Psychologically,” Richards said, “the rising dollar has caused a certain amount of concern among exporters” because it will mean that their products will cost more to foreign buyers. But he urged manufacturers not to panic. The dollar is not headed much higher, Richards predicted, and U.S. firms can continue to count on reaping the benefits of a weak national currency.
Indeed, compared to the 1980s, the dollar remains sharply undervalued. At Wednesday’s close of the New York markets, it still bought only about 1.71 marks, against 2.94 marks at its most muscular phase in 1985. It is worth 139 Japanese yen, exactly 100 less than in 1985.
But compared to a month ago, the dollar is dynamite, especially in Europe. Against the mark, it has bounced back by nearly 19% from its all-time low of 1.44 in mid-February. Its rebound against the yen measures almost 10% from its recent low of 127 yen last month.
What had driven the dollar so low was a realization by investors worldwide that they could earn better profits almost anywhere else in the industrial world than the United States. U.S. interest rates were low--and falling--as the Federal Reserve combatted the recession. Investments could earn 2 or 3 percentage points more elsewhere, particularly in continental Western Europe.
Now the arithmetic may be about to change.
“The recent currency gyrations reflect a change in perceptions about future--rather than current--economic conditions and policies in the United States and Europe,” said John Lipsky, chief economist in London for the Salomon Bros. investment house.
Gault, the DRI-McGraw Hill economist, said investors may soon see the first signs of the end of the U.S. recession. That could mean U.S. interest rates would rise again, which in turn would attract investment funds from around the world.
Meanwhile, Germany’s economy, pre-eminent in Europe, is sagging under the pressure of reunification with the former East Germany, and it faces a potentially devastating immigration from the east if economic chaos worsens in the Soviet Union. Confidence in the German economy was jolted last week by German Bundesbank President Karl Otto Poehl’s remark that currency union with East Germany had proved to be a “disaster.”
Britain remains mired in recession. And France and Italy, Europe’s other major economies, are slowing. Even in Japan, economic growth tailed off to a 2.1% annual rate at the end of last year, and Lipsky, of Salomon Bros., said investors have begun speculating about a reduction in government-set interest rates there.
Then there is the Persian Gulf factor.
Jim O’Neill, director of financial markets research for Swiss Bank Corp. in London, said the lightning victory by the U.S.-led allied forces had the psychological effect of boosting investor confidence in all things American, including the dollar.
He pointed to more tangible consequences, as well. Kuwait--and ultimately Iraq--face gigantic rebuilding costs, and much of the work will go to American companies.
O’Neill conceded that the herd factor contributed to the sharpness of the dollar’s rebound. “Money managers can’t afford to miss a trend,” he said, “because if they do, they’ll have a rather large loss to tell their boss about.”
The unpredictability of the dollar’s course during the past month has made prognosticators leery of firm predictions about its future. By and large, they hold to the theory that what comes down, as the dollar did between 1985 and last month, must go up.
“The general movement upward seems right,” Gault said, “but how much and how fast, nobody knows.”
The Greenback’s Comeback The dollar’s value against the German mark and the Japanese yen. The March, 1991, figures are Wednesday’s; all other figures are monthly averages. Source: National Bank of Beligum
