The dollar's precipitous decline against European currencies has brought overseas customers to Al Lubrano's small Rhode Island manufacturing firm that he hasn't heard from in five years.
Gerry Letendre's manufacturing plant in New Hampshire just hired five employees to keep up with growing European demand, two and a half years after Letendre laid off a quarter of his work force.
On the other hand, the price of Italian hand-painted roosters at the high-end kitchen store Sur La Table just leaped $20, while a cheap-but-decent Cote du Rhone has crossed the deadly $10 barrier at Paul's Discount Wine and Liquor in Washington.
The dollar's dramatic slide against the euro and British pound has already had major real-world impacts, mainly for the good of the U.S. economy. But over the long-term, the fall of the mighty dollar, driven by the United States' record trade and budget deficits, raises far more ominous fears than pricey porcelain poultry: rising interest rates, falling stock prices and an unavoidable decline in the nation's standard of living.
"The engine of the global economy, the U.S., is running not on gas but on fumes, on little more than tax cuts and borrowing," Morgan Stanley chief economist Stephen S. Roach warned last week at the World Economic Forum in Davos, Switzerland.
There can be little doubt that for now, the dollar's fall has been to the United States' advantage, and because China and Japan have been buying dollars furiously to keep their currencies from sliding, Europe has taken a disproportionate beating. The British pound hit $1.8262 Friday, up about 16 percent against the dollar since the end of August. The euro reached $1.2590 Friday, and has now risen about 19 percent in one year. Citigroup predicted last week that the euro would climb to $1.30 in three months.
The dollar's slide has made U.S. goods far cheaper for European consumers, and European exports considerably more expensive here. Letendre's Diamond Casting and Machine Co. in Hollis, N.H., has already boosted shipments of its circuit board printing equipment and industrial valves to Europe by 30 percent. Lubrano, president of Technical Materials Inc., in Lincoln, R.I., said his export business should jump as much as 25 percent this year.
"On balance, the weak dollar has been tremendous for us," Lubrano said.
It is not only the little guy who is benefiting. DaimlerChrysler plans to expand production at its Mercedes-Benz plant in Tuscaloosa, Ala., in part, to take advantage of the weak dollar. Currency changes have boosted the profitability of BMW's plant in Greer, S.C., which could lead to production increases. Volkswagen, which attributed $1.5 billion in losses last year to currency swings, has announced it will be buying more parts and building more cars in North America.
In the first 10 months of 2003, wine imports from France dipped by 703,000 cases, or 7 percent, according to the Wine Institute in San Francisco. California's wine exports to France, although still relatively limited, rose 78 percent in that period, to 898,000 cases.
If the dollar's slide has so far helped manufacturers, farmers and vintners, its primary victims in the United States have been those who could afford the hit: high-end shoppers and international travelers. Kathryn Habenicht, the foreign buying coordinator for Seattle-based Sur La Table, lamented that the chain's profit margins declined from 65 percent to 50 percent or less. Because the company's catalogues are printed up to six months before distribution, its prices have been frozen, forcing the company to absorb the cost of the rising euro. In its newly printed catalogues, hand-painted roosters from the Italian firm Brabo just went up in price, to $119 from $99.
The dollar's fall "has had huge implications for us," fretted Habenicht, who recalled paying 84 cents for a euro when she came to Sur La Table two years ago. "It's a huge problem."
Rick Bellman, co-owner of Paul's, said he is steering customers looking for a bottle of wine under the $10 threshold to vintages from Argentina and Chile. Connoisseurs willing to pay for a French Bordeaux have to pay $33 or $35 a bottle, he said. So far, they have been more than willing.
For the traveler, a $5 Coke in Paris may sound daunting, but tourists have remained relatively undaunted, said Richard Copland, owner of Hillside Travel in the Bronx, and president of the American Society of Travel Agents. The group's annual survey of winter "Hot Spots" found London to still be the top international destination, although the city's lead on Cancun slipped a bit from last year. Paris was still the third most popular destination, although it was cited by only 7.3 percent of travel agents, down from 12.6 percent a year ago.
But travelers should beware, Copland warned. A first-class hotel that may have cost $500 a night a year ago could run $700 now.
"It is more expensive, there's no question about it," he said. "But bookings actually look good compared to last year, when you had war, SARS, the bad economy. The last three years have been the happenings from hell."
Few economists dispute the cause of the dollar's decline. The twin trade and budget deficits are both approaching a half trillion dollars, and with U.S. consumer debt also at record levels, it is up to foreigners to keep the U.S. economy afloat. The U.S. economy now borrows $1.5 billion a day from foreign investors, said Sung Won Sohn, chief economist of Wells Fargo & Co., and that level could reach $3 billion a day in the near future.
Currency traders fretting over that dependency have been selling dollars fast and buying euros furiously. The fear is that foreigners will tire of financing America's appetites. Foreign investors will dump U.S. assets, especially stocks and bonds, sending financial markets plummeting. Interest rates will shoot up to entice them back. Heavily indebted Americans will not be able to keep up with rising interest payments. Inflation, bankruptcies and economic malaise will follow.
A slow, orderly decline in the dollar's worth may avoid a financial panic, but it also gives international investors time to shop for other places to put their money. That could actually put more pressure on interest rates than a sharp, steep drop, as investors demand a premium for holding dollar-denominated assets, Korjut Erturk of the Levy Economics Institute of Bard College, wrote recently.
But a rout on currency markets could be disastrous to the international economy's psyche. In the November issue of Fortune, Berkshire Hathaway chief executive Warren E. Buffett confessed that he had bet against the dollar for the first time in his life by purchasing foreign currencies.
"Our country's 'net worth,' so to speak, is now being transferred abroad at an alarming rate," he wrote.
Net foreign purchases of U.S. securities reached $83 billion in November, more than double the $41 billion bought the month before, according to the most recent Treasury Department statistics. Foreign purchases of Treasury bonds nearly tripled, to $33 billion from $12 billion.
Unlike Buffett, many economists look positively at such vast inflows of foreign cash. Federal Reserve Chairman Alan Greenspan earlier this month pooh-poohed the doomsayers, telling German bankers, "There is, for the moment, little evidence of stress in funding U.S. current account deficits."
Many currency traders are similarly cavalier. After all, the European Central Bank has yet to do its part to bring down the euro's value. By cutting interest rates, European central bankers would make European bonds less attractive and stimulate continental economies. The ECB has resisted the growing pressure to do so.
"If we see U.S. interest rates going up not because the economy is improving but because foreigners are not bellying up to the bar, the Fed and Treasury will consider that dangerous," said Steve Englander, chief North American currency strategist for Barclays Capital. "But we're far from that, and before we get there, the Europeans will cry uncle and cut their interest rates."
But others think such intervention would not be enough to counter the United States' fundamental economic problems of debt and trade imbalances.
"Although much of the rest of the world may still hope that the United States . . . regain[s] its position as the engine of world growth, that role appears increasingly untenable," Erturk wrote in a policy analysis.
Dimitri B. Papadimitriou, the Levy Institute's president, raised the prospects of the dollar falling off the perch it has occupied since the world left the gold standard nearly 60 years ago: the global financial reserve.
"If that does happen, it means a lot," he said. "Clearly, we cannot be the unquestioned leader of the world because the bottom line is still economic strength."
Gerry Letendre's manufacturing plant in New Hampshire just hired five employees to keep up with growing European demand, two and a half years after Letendre laid off a quarter of his work force.
On the other hand, the price of Italian hand-painted roosters at the high-end kitchen store Sur La Table just leaped $20, while a cheap-but-decent Cote du Rhone has crossed the deadly $10 barrier at Paul's Discount Wine and Liquor in Washington.
The dollar's dramatic slide against the euro and British pound has already had major real-world impacts, mainly for the good of the U.S. economy. But over the long-term, the fall of the mighty dollar, driven by the United States' record trade and budget deficits, raises far more ominous fears than pricey porcelain poultry: rising interest rates, falling stock prices and an unavoidable decline in the nation's standard of living.
"The engine of the global economy, the U.S., is running not on gas but on fumes, on little more than tax cuts and borrowing," Morgan Stanley chief economist Stephen S. Roach warned last week at the World Economic Forum in Davos, Switzerland.
There can be little doubt that for now, the dollar's fall has been to the United States' advantage, and because China and Japan have been buying dollars furiously to keep their currencies from sliding, Europe has taken a disproportionate beating. The British pound hit $1.8262 Friday, up about 16 percent against the dollar since the end of August. The euro reached $1.2590 Friday, and has now risen about 19 percent in one year. Citigroup predicted last week that the euro would climb to $1.30 in three months.
The dollar's slide has made U.S. goods far cheaper for European consumers, and European exports considerably more expensive here. Letendre's Diamond Casting and Machine Co. in Hollis, N.H., has already boosted shipments of its circuit board printing equipment and industrial valves to Europe by 30 percent. Lubrano, president of Technical Materials Inc., in Lincoln, R.I., said his export business should jump as much as 25 percent this year.
"On balance, the weak dollar has been tremendous for us," Lubrano said.
It is not only the little guy who is benefiting. DaimlerChrysler plans to expand production at its Mercedes-Benz plant in Tuscaloosa, Ala., in part, to take advantage of the weak dollar. Currency changes have boosted the profitability of BMW's plant in Greer, S.C., which could lead to production increases. Volkswagen, which attributed $1.5 billion in losses last year to currency swings, has announced it will be buying more parts and building more cars in North America.
In the first 10 months of 2003, wine imports from France dipped by 703,000 cases, or 7 percent, according to the Wine Institute in San Francisco. California's wine exports to France, although still relatively limited, rose 78 percent in that period, to 898,000 cases.
If the dollar's slide has so far helped manufacturers, farmers and vintners, its primary victims in the United States have been those who could afford the hit: high-end shoppers and international travelers. Kathryn Habenicht, the foreign buying coordinator for Seattle-based Sur La Table, lamented that the chain's profit margins declined from 65 percent to 50 percent or less. Because the company's catalogues are printed up to six months before distribution, its prices have been frozen, forcing the company to absorb the cost of the rising euro. In its newly printed catalogues, hand-painted roosters from the Italian firm Brabo just went up in price, to $119 from $99.
The dollar's fall "has had huge implications for us," fretted Habenicht, who recalled paying 84 cents for a euro when she came to Sur La Table two years ago. "It's a huge problem."
Rick Bellman, co-owner of Paul's, said he is steering customers looking for a bottle of wine under the $10 threshold to vintages from Argentina and Chile. Connoisseurs willing to pay for a French Bordeaux have to pay $33 or $35 a bottle, he said. So far, they have been more than willing.
For the traveler, a $5 Coke in Paris may sound daunting, but tourists have remained relatively undaunted, said Richard Copland, owner of Hillside Travel in the Bronx, and president of the American Society of Travel Agents. The group's annual survey of winter "Hot Spots" found London to still be the top international destination, although the city's lead on Cancun slipped a bit from last year. Paris was still the third most popular destination, although it was cited by only 7.3 percent of travel agents, down from 12.6 percent a year ago.
But travelers should beware, Copland warned. A first-class hotel that may have cost $500 a night a year ago could run $700 now.
"It is more expensive, there's no question about it," he said. "But bookings actually look good compared to last year, when you had war, SARS, the bad economy. The last three years have been the happenings from hell."
Few economists dispute the cause of the dollar's decline. The twin trade and budget deficits are both approaching a half trillion dollars, and with U.S. consumer debt also at record levels, it is up to foreigners to keep the U.S. economy afloat. The U.S. economy now borrows $1.5 billion a day from foreign investors, said Sung Won Sohn, chief economist of Wells Fargo & Co., and that level could reach $3 billion a day in the near future.
Currency traders fretting over that dependency have been selling dollars fast and buying euros furiously. The fear is that foreigners will tire of financing America's appetites. Foreign investors will dump U.S. assets, especially stocks and bonds, sending financial markets plummeting. Interest rates will shoot up to entice them back. Heavily indebted Americans will not be able to keep up with rising interest payments. Inflation, bankruptcies and economic malaise will follow.
A slow, orderly decline in the dollar's worth may avoid a financial panic, but it also gives international investors time to shop for other places to put their money. That could actually put more pressure on interest rates than a sharp, steep drop, as investors demand a premium for holding dollar-denominated assets, Korjut Erturk of the Levy Economics Institute of Bard College, wrote recently.
But a rout on currency markets could be disastrous to the international economy's psyche. In the November issue of Fortune, Berkshire Hathaway chief executive Warren E. Buffett confessed that he had bet against the dollar for the first time in his life by purchasing foreign currencies.
"Our country's 'net worth,' so to speak, is now being transferred abroad at an alarming rate," he wrote.
Net foreign purchases of U.S. securities reached $83 billion in November, more than double the $41 billion bought the month before, according to the most recent Treasury Department statistics. Foreign purchases of Treasury bonds nearly tripled, to $33 billion from $12 billion.
Unlike Buffett, many economists look positively at such vast inflows of foreign cash. Federal Reserve Chairman Alan Greenspan earlier this month pooh-poohed the doomsayers, telling German bankers, "There is, for the moment, little evidence of stress in funding U.S. current account deficits."
Many currency traders are similarly cavalier. After all, the European Central Bank has yet to do its part to bring down the euro's value. By cutting interest rates, European central bankers would make European bonds less attractive and stimulate continental economies. The ECB has resisted the growing pressure to do so.
"If we see U.S. interest rates going up not because the economy is improving but because foreigners are not bellying up to the bar, the Fed and Treasury will consider that dangerous," said Steve Englander, chief North American currency strategist for Barclays Capital. "But we're far from that, and before we get there, the Europeans will cry uncle and cut their interest rates."
But others think such intervention would not be enough to counter the United States' fundamental economic problems of debt and trade imbalances.
"Although much of the rest of the world may still hope that the United States . . . regain[s] its position as the engine of world growth, that role appears increasingly untenable," Erturk wrote in a policy analysis.
Dimitri B. Papadimitriou, the Levy Institute's president, raised the prospects of the dollar falling off the perch it has occupied since the world left the gold standard nearly 60 years ago: the global financial reserve.
"If that does happen, it means a lot," he said. "Clearly, we cannot be the unquestioned leader of the world because the bottom line is still economic strength."
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