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Losing Currency

Posted By Barry Ritholtz On November 11, 2004 @ 7:09 am In Finance | Comments Disabled

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"The dollar’s rough path just got rockier.

"Another four years of the Bush administration has heightened some fears of continually deep trade and budget deficits, weighing on the dollar’s already depleted value. Throw in high oil prices and lackluster U.S. economic growth and investors betting on the dollar may look elsewhere for better returns, which could ratchet up pressure even more on the dollar."

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Graphic courtesy WSJ [1]
 

Who wins and loses with a weak dollar . . .?

So, who wins and loses with a weak dollar? Here is a quick cheat sheet on the plusses and minuses for individuals, companies and economies:

Individuals

U.S. consumers: Fewer bargains, as foreign-made goods imported to the country cost more. The cost to make the goods overseas is the same, so in order to maintain profit margins, companies may charge more in the U.S. dollars to make up for the weaker exchange rate with foreign currencies.

Overseas investors : One of the few groups that benefit from a weaker dollar. For example, as the euro goes up against the dollar, an American trader selling shares in Milan that also have risen will gain not only from the share-price appreciation, but also by getting back more dollars in the exchange from euros.

American travelers: The weak dollar means that when Americans overseas exchange their money for foreign currency, they won’t get as much. So $100 will only get you about €77.5; two years ago, the exchange rate was almost even. This makes everything from a luxury hotel in Paris to a fine meal in Rome seem even more expensive to travelers using dollars.

Companies

Manufacturers in U.S.: They have a competitive advantage — they don’t have to lower prices on exports to boost sales and capture market share overseas. Just by keeping prices steady, they benefit because the weak dollar means foreign buyers won’t have to pay as much in their respective currencies. The profit margin on each unit is constant, so earnings go up.

U.S. companies abroad: The weak dollar pads profits for U.S.-based companies with big operations overseas, such as Coca-Cola or McDonald’s. A Big Mac in France always is charged in euros, so revenue doesn’t change based on currency fluctuations. But when McDonald’s reports earnings in dollars, a euro translates into more, providing a boost to overall revenue and profits.

Overseas companies in U.S.: For non-U.S. companies with operations in the States, the earnings impact is reversed. Say Sony sells a $1,000 Trinitron TV in the U.S. When the company converts the transaction from dollars into yen, it comes to about ¥105,000. That’s less than it would’ve been two years ago. Back then, the same $1,000 TV amounted to sold for roughly ¥125,000.

Wall Street firms : Institutional investors that trade and manage currencies are uniquely affected. The financial-services industry benefits when the dollar moves in a single, steady direction — regardless of up or down. A steady move provides an incentive for firms to hedge or manage currency-related risks. Although, if the dollar were to fall precipitously, the resulting instability would rattle markets elsewhere.

Economies

U.S. economy : The weak dollar can help narrow the trade gap — a sensitive political issue, whether good or bad for the economy. It also can give a shot in the arm to stagnant growth by giving U.S. companies leeway to raise prices, and boosts demand for exports overseas. The net result can be new hiring, business investment and, eventually, accelerating growth. Ultimately, though, inflation leads to higher interest rates, which damps economic growth.

Overseas: The weak dollar makes international companies’ goods suddenly seem more expensive to Americans, who account for more than 30% of global consumption. If U.S. buyers snap up fewer imports, those overseas countries’ economies end up taking the hit. China has long withstood eliminating its peg to the dollar, which has helped it rack up a huge trade surplus with the U.S.

U.S. tourism : The industry benefits doubly: More Americans vacation in the U.S. to avoid higher costs abroad, while those from overseas come to the U.S., where their currencies command more power. The Travel Industry Association said in its annual forecast that it expects overall traveler spending by domestic and international visitors in the U.S. to increase 6.9% by year end to nearly $593 billion, up from $555 billion in 2003. An additional 5.3% increase in 2005 will bring spending to $624 billion, the association said.

Sources:
Losing Currency:  Who Wins and Who Loses With a Weak U.S. Dollar [2]
THE WALL STREET JOURNAL ONLINE
November 9, 2004 6:22 p.m.
http://online.wsj.com/article/0,,SB110002713358469074,00.html [2]

Bush Policy: Talk a Strong Dollar But Let It Slide [1]
By GREG IP
THE WALL STREET JOURNAL,  November 10, 2004; Page A1
http://online.wsj.com/article/0,,SB110003805570769297,00.html [1]


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URLs in this post:

[1] WSJ : http://online.wsj.com/article/0,,SB110003805570769297,00.html

[2] Losing Currency:  Who Wins and Who Loses With a Weak U.S. Dollar: http://online.wsj.com/article/0,,SB110002713358469074,00.html

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