Does the Strong
Dollar Matter?
Part 4
by Jim Surowiecki
(Surowiecki)
Is The Dollar a One-Time Charge?
The tendency, at least on the part of American corporations, is to write
off currency costs as one-time charges. These corporations want investors
to look at earnings as if we lived in a world in which exchange rates were
fixed, and the cost of money did not change from year to year. But, as has
been suggested here before, the end of Bretton Woods has meant that money
is now a commodity just like any other. Just as airlines are hurt if the
price of oil rises substantially, companies that do a lot of business overseas
are hurt if the price of the dollar rises. Money has become a cost like any
other.
The reality seems to be that American corporations, with their inexorable
need to focus on the bottom line for the quarter, have a harder time adapting
to a strong dollar than the Japanese, for instance, had adapting to a strong
yen. When the Japanese economy and the Japanese yen were strongest, Japanese
companies -- particularly auto companies -- did their best to hold the line
on prices in the United States in the interests of maintaining market share.
Given the fact that currency values do fluctuate over time, it made more
sense for these companies to keep customers, at the expense of profit margins,
than it did to raise prices. But this strategy is easier to pursue in a world
where investors are not clamoring for short-term results, and where any quarterly
drop in earnings growth (let alone earnings) can send a stock through the
floor.
No serious observer of the currency markets would claim that currency valuations
are rational. Traders are often as generally interested in what a government
will do to protect its currency's value as they are in the underlying
fundamentals of national economies. Nonetheless, the rise in the value of
the dollar clearly does reflect the comparative strength of the U.S. economy
relative to Japan and Europe, and it also reflects the much greater return
U.S. investments currently offer foreign money, without any apparent increase
in risk. While Japan's economy remains caught in a deflationary spiral, and
its stock market continues to drop in value, and Europe has yet to find a
way to bring about substantial growth, the U.S. economy continues to grow
and U.S. stocks and bonds continue to provide sizable returns to foreign
investors.
Japanese interest rates, for instance, are now at one half of one percent,
and even that may mean that the real interest rate is too high (since Japan
may actually be suffering from deflation, not inflation). And while European
interest rates remain high -- too high, in fact -- the 1999 introduction
of the Euro has left investors unsure about the stability of current European
currencies. In addition, the persistence of high unemployment and low growth
across Europe makes the mark less attractive.
At the same time, the dollar's high valuation undoubtedly reflects, in part,
the unwavering commitment of Treasury Secretary Robert Rubin (formerly of
Goldman Sachs) to a strong dollar. Though Rubin has more recently attempted
to talk down the dollar from its loftiest heights, two years ago, when Rubin
saw currency traders attempting to spark a run on the dollar, he committed
the U.S. to strengthening its currency by buying dollars across the globe.
In doing so, he beat the traders back and sparked a steady rise in the dollar's
value. Every time it has been threatened since, Rubin has proved willing
to intervene. Though he almost never comments publicly on national policy,
when he does his message is very simple. "A strong dollar is in the interest
of the United States."
By staying on message, Rubin hopes to keep speculators from gambling against
him. Like all markets, the currency market depends as much on what people
believe as on what the reality is. As long as speculators believe that attempts
to short the dollar will be punished by U.S. intervention to strengthen,
such attempts will presumably be rare.
For the Japanese, of course, the weak yen means larger profits for Japanese
companies, but it also means a much lower degree of confidence in their national
economy. In recent weeks, Japanese officials have been making increased noises
about the need to strengthen the yen. Although the Japanese economy is suffering
from underconsumption and overinvestment, in the long run the nation needs
Japanese investors to stay at home if it's going to be able to embark on
a period of sustained growth. That will be hard to bring about as long as
the dollar remains so strong.
There's no question that, as consumers, we reap benefits from the strong
dollar. Insofar as Rubin's commitment to the dollar frees U.S. national policy
from currency traders' whims, we also reap benefits as citizens. What Rubin
has showed, after all, is that nations are not impotent in the face of the
currency markets, and that a meaningful effort to keep the dollar strong
can defeat speculative attacks.
At the same time, the strong dollar does erode our manufacturing base by
making it more difficult to compete, both at home and abroad. It also undoubtedly
contributes to the flight of jobs abroad, since paying a Malaysian worker
instead of an American worker is even cheaper if the dollar is strong. These
effects of the dollar are localized, though, and they play themselves out
over the long term. The money we save today at the CompUSA we may pay out
tomorrow in unemployment benefits, but the connection between the two will
never get made. It would make sense for investors to take the current reality
of the strong dollar into account in evaluating companies, but that may very
well be asking too much. In a world in which time horizons are no longer
than the next quarter, thinking about the next five years sounds only like
a pleasant dream. |