January 2, 1997
Rising Dollar Has U.S. Executives Concerned
Related ArticlesOutlook '97, Business Day's annual survey of the economy, markets and industry
By JONATHAN FUERBRINGER
he dollar's rally last year against its two main rivals -- the Japanese yen and the German mark -- pushed the American currency up far enough that American executives have begun to worry anew about its impact on competitiveness, sales and profits.
The dollar was bolstered in 1996 by lower interest rates in Europe and Japan and better economic performance in the United States than abroad, both of which attracted foreign capital here. The outlook for this year is mixed. But even forecasters who see the dollar treading water this year think factors already in place could well move it higher toward the end of the century.
And that raises a question: Are American companies ready to deal with a stronger dollar?
Van Bussmann, chief economist at the Chrysler Corporation, thinks American auto makers have become quicker on their feet, a change seen throughout the country as American companies revived their competitiveness over the last decade.
But Mr. Bussmann is not sure that Americans are as nimble as the Japanese, who have made an art of surviving a strong yen by cutting costs and holding back price increases. "Maybe on average we cannot change as rapidly as the Japanese," he said, adding that most American companies would have a hard time matching the Toyota Motor Corporation's recent cost-cutting turnaround with its Camry model.
And he is worried that a weaker yen will augment Japan's cost-cutting advantage, adding to profits from sales in the United States and making it even easier for Japanese auto makers to avoid raising prices.
"If that nimbleness to reduce costs is supplemented by a depressed currency, that is a double whammy," Mr. Bussmann said.
Jerry J. Jasinowski, president of the National Association of Manufacturers, is also worried, both that American companies may have trouble with a stronger dollar and that despite the association's own forecast the dollar still might move higher in the year ahead.
"I think that despite the revolutionary changes American manufacturers have made to put them in a low-cost position, they are not adequately prepared to deal with a yen of 115 and higher," he said.
The dollar hit 116.18 yen on Dec. 30, its highest since March 1993, and some forecasts for next year have it continuing to rise. It finished the year at 115.93 yen, up 12percent for 1996.
While Mr. Jasinowski is less concerned about the dollar's rise against the German mark, which finished the year up 7.2percent at 1.5415 , he said a further strengthening would pressure American companies.
And the Clinton Administration should pay close attention to exchange rates, Mr. Jasinowski added. "Both Japan and Europe are looking to export their problems to the United States by manipulating their exchange rates," he warned. He said Japan, Germany and other European countries, especially France, were trying to bolster the dollar to kick-start their own economies by making their exports cheaper.
These concerns and jawboning by the Clinton Administration come at a time when the dollar has rallied 13.9 percent against the mark since its all-time low of 1.3534 and 43.8 percent against the yen from its all-time low of 80.63 , clearly reducing a competitive advantage that helped earnings at many American companies.
If the dollar moves higher this year, American companies could try to press the Clinton Administration to help them out.
The National Association of Manufacturers is forecasting a decline in the value of the dollar, but Mr. Jasinowski said he saw "considerable risk on the upside."
Many Wall Street forecasters expect the dollar to rise at the beginning of 1997 but fall enough later to finish the year lower, easing the pressure on American companies.
That is the case at Goldman, Sachs & Company, where economists forecast rates of 105 yen and 1.45 marks to the dollar at the end of this year. The move down, according to the Goldman forecasters, will be propelled by a rising United States trade deficit and an expected increase in the outflow of United States capital as other countries' economies begin to pick up in 1997.
But Jim O'Neill, Goldman's chief currency economist, said he now expected the current strength of the dollar "will remain longer," taking the currency to 1.60 marks and 116 yen early this year.
The chief economist at Salomon Brothers, John Lipsky, said the dollar may not move much this year but is poised to go higher over the next several years.
"There are two good arguments to think that the dollar is in a period of longer-term recovery," Mr. Lipsky said.
Foreign investors, he said, still have higher inflation expectations for the United States than they do for Germany and Japan, and those expectations depress the value of the dollar. But this perception is likely to change if the current moderate rate of inflation here continues.
The second force is the expected buildup in the national savings rate as individuals invest more for retirement and the Clinton Administration and Congress move to cut the budget deficit.
Michael Rosenberg, head of international fixed-income research at Merrill Lynch & Company, forecasts that the dollar will shoot higher this year against both the yen and the mark and continue to rise thereafter. By the end of 1997, he forecasts rates of 120 yen and 1.70 marks to the dollar.
Similar forces are driving the dollar against both currencies, Mr. Rosenberg said. In Japan and Germany -- as well as most of the rest of Europe -- central bankers will keep interest rates low while governments cut spending (in Europe) and raise taxes (in Japan) to bring down their deficits. Such a policy mix, he said, is a prescription for a weaker currency, which means the dollar moves higher. Citing one example, Mr. Rosenberg said economic growth in Germany remained weak enough to prompt the Bundesbank, the German central bank, to cut key interest rates one more time, a move that could strengthen the dollar.
But Mr. Rosenberg, whose view is one of the most bullish on Wall Street, is less worried about the impact of a stronger dollar than others. "One reason the U.S. is so strong is that the dollar has been undervalued," he said, arguing that at 1.70 marks to the dollar, the American currency is still "undervalued by our calculations."
The strong dollar does not necessarily mean United States companies will lose market share, he said. "But the profits won't be so good," he added.
Copyright 1997 The New York Times Company
