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Weak Dollar's Effect Isn't That Clear-Cut

U.S. producers with sites overseas may not profit. And the buck isn't down against all currencies.

May 20, 2003|Tom Petruno | Times Staff Writer

With the dollar riding high for much of last year, Tom Ruzich decided it made sense to find a partner in Europe to make and sell his company's fire-rescue chainsaws there.

For Julian, Calif.-based Edge Industries Inc., which produces the Cutters Edge line of saws, manufacturing in Europe offered the potential to better compete against continental rivals, Ruzich figured.

Now, with the 15% plunge in the dollar against the euro since September, Ruzich is having to rethink his strategy. At a minimum, because the royalties he negotiated with the European partner are paid to Edge Industries in dollars, the deal may have become a lot sweeter for the partner than for Edge.

"We're going over there in June to talk," said Ruzich. The dollar's reversal, he joked, is providing a new element of on-the-job training for him and his 18-year-old company.

His case illustrates how the standard line about the slumping dollar's benefits -- that it will revitalize the U.S. manufacturing base -- is an oversimplication of a highly complex issue.

It's true that the dollar's plunge in recent months against the euro, the Canadian dollar, the Australian dollar and other major currencies can make U.S. exports automatically less expensive for foreign consumers. For example, a product priced at $10 cost 10.1 euros on Oct. 1. It now would cost 8.6 euros, all other things being equal.

At the same time, the dollar's drop can make it more expensive for foreign companies to sell their goods here, providing a competitive boost for U.S. firms.

John Devine, chief financial officer of General Motors Corp., on Monday echoed the sentiments of many major U.S. exporters when he said at a news conference in Detroit that the dollar's shift is "going to help."

Wall Street believes that has been the motivation of the Bush administration as Treasury Secretary John W. Snow in recent weeks has made comments strongly hinting that the administration is content to see the dollar keep sliding.

Many investors, however, have been suspicious about picking potential winners from an improved export outlook. There has been concern that the dollar might quickly reverse course.

Prudential Securities recently compiled a list of U.S. companies with the greatest sales exposure to Europe. At the top of the list was Dow Chemical, with 33% of total sales in Europe. Yet Dow's stock is up just 4% this year, compared with a 5.3% rise in the Wilshire 5,000 stock index.

Investors' interest in the export story "is just heating up," said Steven Wieting, economist at Smith Barney in New York.

But the effects of the dollar's swing on companies often aren't as cut and dried as the trend might imply.

One issue is that many U.S. companies got used to a strong dollar over the last 10 years and adjusted their businesses accordingly -- including by moving production offshore to offset the buck's gains. That may mean there will be no benefit for some domestic manufacturing operations as the dollar declines.

Another issue is that, although the dollar has fallen sharply against a number of rivals this year, its slide against a basket of currencies weighted for the countries' importance to U.S. trade has been less severe. So the "weak dollar" isn't necessarily apparent, thus far, to many U.S. firms.

A trade-weighted dollar index compiled by the Federal Reserve is down 9% from its peak in February 2002 -- far less than the dollar's losses against the euro, for example.

Ali Zahedi, owner of Lafayette Textile Industries in Los Angeles, said the dollar's drop against the euro doesn't directly help him against the Chinese rivals that are his primary competitors in supplying fabric for clothing. Because China pegs its currency to the dollar, its exports are getting cheaper along with U.S. exports.

Still, Zahedi said the dollar's trend is giving more hope to U.S. textile companies that have been battered for years by import competition. For companies that have been on the brink of shutting down, "This may alter their decision," he said.

But that has consequences that may not be particularly helpful to stronger textile firms, Zahedi said. The more domestic competition that remains, the harder it will be for all companies to raise profit margins, he said.

With the U.S. manufacturing sector operating at 72.5% of capacity -- a 20-year low, according to Federal Reserve data -- the domestic competition for any new export business could quickly become fierce.

Some U.S. exporters say the dollar's trend can easily be overridden by other factors.

Orange-based Arden Engineering, a producer of aircraft components, makes about 10% of its sales overseas. But its business with its Irish customer, a unit of aerospace firm Bombardier Inc., has been cut back about 50% in the last eight months, even as the dollar has fallen, said Arden President Michael Stow.

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