Like declining real estate or stock prices, the diminishing dollar is neither uniformly beneficial nor harmful. Consider Accor North America, Inc., a division of Paris-based Accor, a global hotel operator. When the company needs extra funds, perhaps to make an acquisition, the declining dollar comes in handy. "Taking advantage of the dollar devaluation means that it's cheaper to borrow from our parent than a bank," says Stephen Manthey, senior vice president and treasurer with the Carrollton, Texas-based firm. This is because the parent company's euros now are more valuable than they were a year or two ago.
On the other hand, "we have more pressure on results," Manthey says. "If we're making money, we can't send it back to our parent, because the dollar/euro ratio is so weak. We're handcuffed to the currency." For example, although Accor sold its Red Roof subsidiary in September 2007, netting about $400 million, Manthey since has kept the funds in the U.S. "It's not worth taking the hit. A better solution is to efficiently use the capital in the U.S.," perhaps by making an acquisition, he says.
"In my view, the dollar's decline is both a plus and a minus for us," Manthey says. This is the case more broadly, as well. Exporters typically do well when their currency drops, as their products become more competitive outside their home markets, says Animesh Ghoshal, professor of economics at DePaul University, Chicago. Conversely, importers take a hit, as the costs of their goods or materials rise.
To be sure, the idea that the dollar is falling doesn't always go over well. "People think of a strong dollar like a strong body," says Dean Baker, co-director of the Center for Economic and Policy Research, an independent research group in Washington, D.C. "But, there's no particular virtue in having a strong dollar."
That's good, given the greenback's downward slide over the past few years. As of January 2004, 0.79 euro was required to purchase $1, while in December 2007, only 0.69 euro was required, a drop of about 13 percent. Closer to home, the loonie, or Canadian dollar, hit parity with U.S. dollar in September; the last time this occurred, Jimmy Carter was in office. As of early January, it still was trading at around $1.
These shifts are showing up in a range of statistics. In November 2007, prices for imports from the European Union rose for the seventh consecutive month, increasing 0.2 percent, while prices for goods coming from Canada jumped 4.7 percent. For the year ending in November, the prices of imports from Canada were up 12.9 percent, while imports from the EU were up 3.3 percent. The rises can be attributed to higher fuel prices and the declining dollar, reports the Bureau of Labor Statistics.
Importers are getting doubly hit, as the growth in economies outside the U.S. also is boosting the cost of imported goods, says Bill Conerly, economic consultant with Conerly Consulting in Lake Oswego, Ore. "It's the end of China pricing," Conerly says, referring the ability companies have had to take advantage price of low labor rates when pricing imported goods. The growing middle class in China and other less developed countries is putting pressure on wages, which ultimately is reflected in the prices of goods manufactured there.
Exporters tend to be faring better, after struggling to compete internationally over the past few years when a strong dollar boosted the prices of their goods outside the U.S. "One of the bright spots of the U.S. economy is strong exports," says Marc Chandler, global head of currency strategy with Brown Brothers Harriman in New York. For exporters, the falling dollar, combined with growing economies overseas, is boosting demand.
In fact, Standard & Poor's estimates that at some point in 2008, more than half of the revenue collectively reported by the companies in the S&P 500 index will be generated outside the U.S., says Howard Silverblatt, senior index analyst.
Power Curbers, Inc., a Salisbury, North Carolina-based manufacturer of equipment that fashions curbs, sidewalks, and highway barriers from cement, is experiencing this type of shift. In 2007, "we filled a decline in domestic orders with international orders from the growing infrastructure needs in emerging markets," says President Dyke Messinger. Early in 2007, the company's distributors alerted Messinger that interest was growing. "More infrastructure development overseas leads to more sales."
The declining dollar contributed to Power Curbers' international growth, as well. Messinger estimates that it accounted for about 20 percent of the increase outside the U.S. Power Curbers' sales overall doubled in 2007, with about one-third generated internationally; this share will grow in 2008, he predicts.
At II-VI, Incorporated, a leader in the growth of synthetic crystal materials that are used in laser optics, telecommunications, and other high-tech products, the declining dollar hasn't had as much impact, says Craig Creaturo, chief financial officer and treasurer with the Saxonburg, Pa.-based firm. This is the case even though II-VI operates around the globe. The company manufactures in China, the Philippines, Singapore, and Vietnam, and sells in Japan, Europe, and the United Kingdom, among other places.
However, most of the raw materials processed in II-IV's Asian manufacturing facilities start in the U.S. For example, II-VI grows zinc selenide, a material used in infrared applications, within the U.S. in order to protect its trade secrets, Creaturo says. Employees then send the material to Asia via an intracompany transfer, where such labor-intensive activities as fabricating and polishing take place. The final product is transferred back to the U.S. So, even though the materials traverse the ocean several times, II-VI's functional currency is the U.S. dollar.
In Europe, while II-VI sells most of its finished products in euros, a few larger customers prefer to pay in dollars so that they can offload any dollars they've accumulated. For II-VI's sales in euros, the declining dollar works to II-VI's advantage, as most of its production costs are tied to the dollar. When the dollar declines, so do those costs.
The one country in which II-VI actively hedges is Japan, as the company consistently takes in more yen than II-VI needs to run operations there. Each month, Creaturo reviews upcoming orders and estimates the time lag until the orders are filled and converted to cash. He then enters into one or two forward contracts to sell the incoming yen when they're received. The goal is to cover about 75 percent of the yen received from II-VI's customers. "Since we need some yen to run our business, we don't hedge it all, but the 75 percent target has worked well for us," Creaturo says.
Cybex Inc., a manufacturer of exercise equipment for health clubs and fitness centers, based in Medway, Mass., has benefited from the declining dollar. "For us, the net impact is positive," says Arthur (Art) Hicks, president and chief operating officer.
About one-third of Cybex's sales come from outside North America, primarily from Asia and Europe, while its manufacturing operations are in the U.S. Although labor costs stateside are higher than they would be in less developed countries, manufacturing domestically allows Cybex to tailor its products to customers' needs. The company offers about 170 different strength training machines, all of which can be customized with features such as custom-colored upholstery. "We have a build-to-order system," Hicks says.
As the dollar has dropped, Cybex's distributors in Europe have been able to buy more with the same amount of money. In some countries, such as Italy, Cybex competes primarily with domestic manufacturers or those from other countries in the European Union. Assuming that these companies' production costs are based on the euro or another European currency, their costs become relatively higher as the dollar declines.
In the U.S., foreign competitors account for about 30 percent of the market, Hicks says. The declining dollar, combined with higher shipping charges, is making them less competitive. However, some competitors appear to be dropping their prices to counter the currency change, Hicks observes.
Cybex hedges its sales in the United Kingdom, where they are denominated in the pound sterling and account for about 5 percent of revenue. Hicks reviews a 13-month rolling sales history to determine the level of pound sterling sales to expect in the upcoming few months to estimate Cybex's future exposure. He purchases forward contracts to lock in the dollar/sterling exchange rate. That way, "the sales team can provide customers quotes knowing what the real margin will be," Hicks says.
The Dollar's Impact on Energy
While most of the recent rise in oil prices is due to increasing demand, particularly from developing countries, the declining dollar plays a role, as well. As the dollar drops, producers of petroleum and other commodities demand more greenbacks for their wares. In general, a 1 percent drop in the dollar pushes the prices of commodities up by 1 percent, says Conerly.
So far, volatile energy prices don't appear to have significantly affected most companies' operations or performance. This could change, of course, if prices skyrocket. And, energy costs are driving up other prices. The Consumer Price Index rose by 0.8 percent in November 2007, the largest jump since September 2005, reports the U.S. Bureau of Labor Statistics. Seventy percent of the jump was due to rising energy prices, the Bureau said.
The big question, and one that is impossible to answer, is just how long it will be before the current economic landscape shifts. At least some economists and currency experts predict a rising dollar in 2008. Chandler at Brown Brothers Harriman estimates that it will rise by about 10 percent against the euro this year.
"Currencies always come back into balance. They go to extremes and revert to the mean," says Boris Schlossberg, senior currency strategist at DailyFX.com. He notes, however, that the dollar probably won't return to its previous levels, given America's changing role in the world economy. "The U.S. is still substantial and a key player, but no longer the dominant player," he says.
Moreover, while the declining dollar has its benefits, it prompts some longer-term concerns, says Mike McDonald, president of the investment advisory firm Dollar Crisis and Recovery Partners, LP, La Quinta, Cal.
For starters, rising import prices eventually will strain consumers' wallets.
In addition, "the currency reflects the relative value of a country," McDonald notes. As demand for commodities and energy grows around the globe, the U.S. will have to compete for these goods. This becomes more difficult with a weakened currency, he says. Prudent national economic policies will be key to a sustained stronger currency, McDonald adds.
As unsettling as the current economy appears, most businesses have survived challenging periods before, says Accor's Manthey, recalling the 1980s, when mortgage rates hovered around 13 percent and the S&L industry imploded. The key to intelligently navigating the economy is staying grounded, Manthey notes. "Keep your head about you. Stay disciplined and focused, and stick to the basics."
Guidebook: How to Survive and Flourish in the Land of the Devalued Dollar
Treasurers, economists, and currency traders offer guidelines for effectively navigating the dollar's ups and downs:
Don't let currency fluctuations drive your market strategy. "You don't want the current valuation of a currency to be the only thing you're depending on," says Andrew Bernard, professor of international economics at Dartmouth College, Hanover, N.H. Your firm needs to pursue markets in which it can build sustainable advantages.
Assess your firm's foreign exchange exposure market by market, considering both production and sales. Today, few treasurers or CFOs can assume that their exposure consists only of the dollar and another currency. They may manufacture in, for instance, Mexico and sell into the United Kingdom. "Companies aren't as dollar-centric," says Wolfgang Koester, chief executive officer with FIREapps, Inc., a Scottsdale-based provider of technology solutions for managing foreign exchange exposure.
Any treasurer working with a company exposed to currency fluctuations should hedge. "Well-managed firms stick to areas in which they have expertise," says Animesh Ghoshal, professor of economics at DePaul University, Chicago. "They should not dabble in currency risk." Financial executives often need to initiate this conversation with the board of directors, says Koester. For public companies, investors punish currency reversals that result in a loss more strongly than they reward profits from currency changes, he notes. Board members, who are a step removed from the markets, often fail to recognize this. Moreover, the presence of a windfall profit tells the world that you are speculating (despite your protestations to the contrary) or that you don't really know what you're doing.
Make international economic issues a part of the core strategy of your firm, says Bernard. Develop a plan to guide your business strategy in times of both a rising and a falling dollar. "Being reactive puts you at a disadvantage," he says. Bill Conerly, economic consultant with Conerly Consulting in Lake Oswego, Ore., identifies four steps to success: Evaluate your firm's vulnerability to the overall economy, based on its geographic region and industry; set up an early-warning system using industry-specific measures; identify steps to take in down- and upturns; and manage your business to allow for flexibility. For example, avoiding long-term supply contracts increases your ability to flexibly operate your business.
If it makes sense for your operation, diversify geographically. This reduces your vulnerability to fluctuations in any one currency pairing, notes Dean Baker, co-director of the Center for Economic and Policy Research, Washington, D.C."The more markets we can play in, the more we spread the risk," says Dyke Messinger, president of Power Curbers. "Ecuador and Indonesia, for example, have totally different business cycles."