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St. Louis Post-Dispatch, David Nicklaus column: Deflated dollar may be costly in long run
Nov 08, 2009 (St. Louis Post-Dispatch - McClatchy-Tribune Information Services via COMTEX) --
Plenty of U.S. manufacturing executives are cheering for a weaker dollar, but Emerson Chief Executive David Farr isn't one of them.
A deflated currency makes U.S. products, from cars to computer chips, more competitive against their overseas rivals. It produces gains for U.S. multinationals that earn some of their money in euros or Brazilian reals. Emerson, for instance, told analysts this week that it expects modest currency-translation gains in its fiscal first quarter.
In Farr's view, however, those gains are fleeting. "It inflates our sales, but that's very short term," he said in a recent telephone interview. "There's not value being created."
Pressured by a large trade deficit and low interest rates, the greenback has been sliding downhill for nearly eight years. Since January 2002, it has depreciated 34 percent against a basket of major currencies. Last year's financial crisis boosted the dollar as investors scrambled for the safety of U.S. Treasury bills, but the slide has resumed this year. It takes $1.48 to buy a euro today, for example, compared with as little as $1.25 last winter.
That's bad news for American tourists, but good news for companies competing against French wine or German industrial equipment. "The dollar's decline is good for exports, bad for imports," says Steven Fazzari, professor of economics at Washington University. "It directs more demand domestically, and that's good in this environment."
Indeed, economists hope that export-focused companies will start adding workers soon, helping bring down unemployment from its 26-year high of 10.2 percent.
The trouble is that when our products become cheaper, so do our assets, from stocks and bonds to real estate. "In the longer run, it's making Americans less wealthy relative to the rest of the world," Fazzari says.
The wealth effect is what worries Farr. If the dollar continues to decline, he said, "It means we will move our assets around the world more and more, because you don't want to have all of your assets in a weak-dollar country."
"If you have a weak currency, you lose your capability of controlling your own destiny," Farr added. "That's why Emerson has succeeded over the years: We have controlled our own destiny."
Anheuser-Busch, by contrast, couldn't control its destiny. The weak dollar was one factor that enabled InBev to buy the American brewer last year.
Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, thinks the dollar actually has become slightly undervalued. "We could see the dollar recovering a little bit of its losses in the next few months," he said. "We still believe the long-term trend for the dollar is gradually lower."
His long-run view is driven by worries about inflation and the federal budget deficit. Thayer isn't predicting a financial meltdown, but he does think our policies are more inflationary than those of our trading partners.
The dollar's decline has prompted some griping by Chinese officials, who say that perhaps the greenback should no longer be the world's main reserve currency. So far, no one has proposed a viable alternative, but Thayer says the dollar eventually will have to share the global stage.
"That's a natural part of globalization, and I don't think we need to worry about it," he said.
How we arrive at that new world order will make a big difference. If it happens because other nations are growing and thriving, fine. But if it happens because the U.S. has fallen into long-term decline, then we all, Fortune 500 companies included, will have a lot to worry about.
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