THE VOLATILE DOLLAR : NEWS ANALYSIS : Greenback’s Slide: It’ll Hit You Sooner or Later : Currency: Competition can keep prices down for a time. But eventually the consumer will have to pay.
Back in the good old days, say three months ago, when a dollar was really worth something, you could buy a Panasonic videocassette recorder at the Graffiti discount electronics store five blocks from the White House for $199.
Since then, the value of the Japanese yen has soared against the dollar, and the U.S. currency buys fewer and fewer yen. Yet that same Japanese-made VCR now costs $179.95. What gives?
What gives is that the value of the dollar and the value of the yen are important factors in determining the price of that VCR, but they are not the only factors. Profit margins, productivity of workers and--particularly important--competition from other retailers all play a part in determining the price that a store pays a distributor and the price it charges a consumer.
So, does that mean the stunning and often confusing gyrations of the international currency markets--and the skidding value of the dollar--have little relevance to the American consumer? Not at all.
On any given day, as much as $1 trillion may change hands in the currency markets of New York, Tokyo, Frankfurt, London and other cities. Based on their expectations of future value of an individual currency, traders place bids for purchases of yen, dollars, German marks and other currencies, with the goal of buying them for one price and selling them at a higher price.
On Monday in Tokyo, for example, the dollar sank briefly in value to a low of 80.15 yen, a drop of an astonishing 20% since the beginning of the year, before climbing out of its trough with the assistance of a purchase of dollars by the Bank of Japan. In New York, it gained slightly, quoting at 83.98 yen, up slightly from 83.70 on Friday. Traders who are buying the dollar now are betting that its value will increase relative to the yen.
Far from the swirl of the financial markets stands Mark Bitz, a salesman at Graffiti. And a few steps up the economic food chain stands Brian Hoffman, marketing manager for Panasonic’s VCR division in the United States.
Bitz shed some light on why the dollar’s seemingly inexorable downward spiral has had little impact on today’s price of the VCR compared with its cost a few months ago. And Hoffman, from his perch, explained why the dollar’s drop will eventually hit all American consumers who buy Japanese goods.
“To be honest with you, prices have stayed very, very much the same for the past few months,” Bitz said. The reason, he said, is local competition.
“Retailers are putting pressure on distributors and manufacturers,” the salesman said, as they fend off consumer pressure from such sprawling, large-volume national discounters as Circuit City.
As a result, he said, his relatively small shop has been able to obtain the $199 VCR from Panasonic for $177, roughly the same price it paid last summer, despite the rising yen and sinking dollar. But the mark-up it charges its retail customers has nearly disappeared.
Does Panasonic take a loss as the dollar sinks but the wholesale prices remain steady? Not necessarily.
Large companies doing international business routinely buy blocks of foreign currency, precisely as a hedge against fluctuating exchange rates.
That way, said Panasonic’s Hoffman, “when exchange rates go up or down, you won’t see the effect immediately; it’s not constantly adjusting.”
But over a period of time, despite efforts to soften the impact of the more-expensive yen, “I have a responsibility to my dealers to make sure I provide them with a competitive product,” he said. “It has a dramatic effect on our business.”
That’s because companies can modify price increases by playing the currency market for only so long.
Eventually, said David Buchen, managing director of foreign exchange at Citibank, “Toyotas and televisions will be more expensive for the average consumer.”
But, he predicted, so will Fords, Chevys and just about every other vehicle, foreign or domestic. And the fact that more than 50% of the Japanese vehicles sold in the United States are made here, according to the Japan Automobile Manufactures Assn., will not protect them from higher prices.
And that is where the longer-range impact of the weak dollar comes into play, making its impact on American consumers unavoidable.
As foreign competitors are forced to raise prices, U.S. manufacturers have two choices. They can boost profits by raising their own prices in tandem with foreign prices, or they can hold the line on prices and make more profit by selling more cars--if their factories have the capacity to keep up.
But as the dollar settles at a level well below the value of 100 yen at which it began 1995, the betting is on higher prices.
“You would expect about 50% (of the higher value of the yen) to show up in prices. And certainly lots of Japanese companies have been raising prices in slow increments,” said C. Fred Bergsten, director of the Institute for International Economics, a Washington policy research organization.
“If the dollar hits 80 (yen) for 30 minutes, they won’t raise their prices. But if it levels off at 85 for three months, they’ll say, ‘OK, we have to pass that through.’ ”
