New party line in U.S.: Weak dollar good, won't be inflationary

Paulson's Weak Dollar
Boosts Growth
Without Fueling Inflation

By Matthew Benjamin and Vivien Lou Chen
Bloomberg News Service
Monday, October 8, 2007

http://www.bloomberg.com/apps/news?pid=20601109&sid=acan_4u7wIJI&refer=home

Treasury Secretary Henry Paulson, whose signature appears on every new dollar bill, may find the weak currency with his name on it helps the U.S. economy more than the strong one he publicly endorses.

The dollar's 8 percent slide during Paulson's 15 months in office is good news on the docks of Long Beach, California, where shipping containers are making their return trip to Asia filled with U.S.-made computer, auto and aircraft parts whose prices have become more competitive abroad. What's more, economists don't foresee the weaker currency generating higher import prices and accelerating inflation.

"The dollar is in a quasi-sweet spot," says Joseph Quinlan, chief market strategist at Bank of America Corp. in Charlotte, North Carolina. "It's dropped enough that it's creating an earnings upside for U.S. multinationals, while I expect many foreign companies to hold the line on prices they charge U.S. consumers."

Exports by General Motors Corp., Boeing Co., and other U.S. companies were up 11 percent in the second quarter from a year earlier, shrinking the nation's trade deficit in goods for the first half by $14 billion, to $405 billion, and helping the economy weather the housing bust.

According to estimates by Goldman Sachs Group Inc., that's the biggest improvement in 20 years; exports of goods grew more than twice as fast as imports in the first half of 2007.

...Further Narrowing

The government will report August trade figures on Oct. 11, and a Bloomberg survey of economists says they will show a further narrowing of the gap.

Asked how Paulson, 61, views the dollar's recent slide, his spokeswoman, Brookly McLaughlin, refers to recent statements from him that reiterate the official U.S. policy since Robert Rubin ran the Treasury under President Bill Clinton: "I feel very strongly that a strong dollar is in our nation's interest."

As Treasury secretary, he can't be expected to say anything else, says Tom Fitzpatrick, global head of currency strategy at Citigroup Inc. in New York.

"The U.S. needs external capital to fund its deficits," he says. "So you have to say a strong currency is in your interest, because if you go the other way, why the hell would anyone want to invest here?"

At the same time, Paulson has good reason to be privately pleased with the dollar's decline, says Sophia Drossos, currency strategist at Morgan Stanley in New York and a former Federal Reserve economist.

...Protectionist Pressures

Noting that Congress is considering sanctions to redress the trade imbalance with China, she says, "If you are the U.S. administration and you don't want to see protectionism take hold, what is your incentive to change anything? It doesn't seem like it's in the interest of the U.S. Treasury to arrest the decline of the dollar. They are accepting it as a move based on fundamentals."

The impact of the dollar's weakness is evident at the port of Long Beach -- the nation's second-busiest behind Los Angeles -- where exports jumped 34 percent in August from a year earlier.

Larry Cottrill, the port's director of master planning, says the number of unfilled containers leaving the port dropped 14.5 percent in August and was down 4.5 percent for first 11 months of the year ended Sept. 30. That's a turnaround from the last decade, when the fastest-growing container category was outbound empties, he says.

...Fewer Empty Containers

In the past year, Cottrill says, he's seen a decline in empty-container shipments "up and down the West Coast."

The cheaper dollar isn't just attracting overseas buyers; it's luring business to U.S. shores as well. Foreign visitors to New York City are taking advantage of their increased buying power to snap up diamonds and gold at Tiffany & Co. stores, helping the luxury jeweler to its biggest sales gain in seven years during the second quarter.

In San Francisco, George Chairakakis, a 30-year-old naval architect from Athens, said last week he bought "20 percent to 30 percent" more than he'd intended during a 10-day visit.

"I've exceeded my budget because of cheaper prices," he said while walking through Union Square carrying bags of clothes and shoes.

The demand from overseas is a welcome boost to the U.S. economy as the two-year housing recession and tighter credit standards threaten to suppress consumer spending.

...Adding to Growth

Trade added 1.3 percentage points to growth in the second quarter, the most since 1996 and the first time since 1991 that exports contributed more than consumer spending to the economic expansion.

"The U.S. is becoming like the old Japan," says Jim O'Neill, head of global economic research at Goldman Sachs. "Domestic demand is soft, but exports and fixed investment spending are very strong, which people have been crying out for from the U.S. for years."

In Schaumburg, Illinois, west of Chicago, Jason Speer of Quality Float Works Inc. says "'sizzling' would be a perfect word" to describe demand from China to Mexico for his company's products, which are used in portable water dispensers and tanks.

He says export sales are up 10-fold since 2003 and represent 26 percent of the firm's revenue, compared with 3 percent four years ago.

...'Tremendous Opportunity'

"We are getting inquiries on a daily basis from all over the globe," says Speer, vice president and general manager. "The dollar is so weak now that there's tremendous opportunity for manufacturers."

GM, the largest U.S. automaker, will sell $800 million worth of Buicks and auto parts to its joint venture in China during the next four years, the Detroit-based company announced last month.

Farm-equipment maker Deere & Co. of Moline, Illinois, predicts revenue from South America will climb 30 percent this year. Seven of every 10 commercial planes on Boeing's backlog of orders are going to foreign markets, up from a third just six years ago.

"Clearly, the dollar hasn't hurt us," says Randy Tinseth, vice president of marketing for the Chicago-based company.

Meanwhile, his main competitor is suffering as the euro nears record levels. Toulouse, France-based Airbus SAS faces extra costs of $1.41 billion for every 10-cent increase in the euro against the dollar, Chief Operating Officer Fabrice Bregier estimates.

...Absorbing the Hit

When faced with a falling dollar, foreign companies tend to absorb the hit to profits or try to cut costs rather than charging more, according to a September study by three Federal Reserve economists.

Official statistics support that view. U.S. import prices excluding fuel were up 2.2 percent in August from a year earlier, compared with a 2.9 percent rate at the end of last year. The Fed's preferred measure of inflation, the personal consumption expenditures core price index, rose 1.8 percent in August from a year ago, the smallest gain since February 2004 and within Fed Chairman Ben S. Bernanke's stated comfort zone.

"Even when the dollar is weakening, they don't raise prices in the U.S.," says Fed economist Joseph Gagnon, one of the paper's authors. Often, businesses make that choice to defend their U.S. market share, he says.

...Shifting Production

Rainer Schmueckle, chief operating officer at Daimler AG's Mercedes Car Group, said at a Sept. 25 press conference that the Stuttgart, Germany-based company would have to consider shifting more of its production to the United States if the euro, currently at about $1.41, were to rise above $1.45 and remain there.

In Canada, whose dollar has risen to near-parity with the U.S. currency for the first time in 31 years, the biggest software maker, Cognos Inc., is holding the line on prices even as the exchange rate eats away at its profits.

Second-quarter license sales at the Ottawa-based company, which exports more than half of its products to the U.S., missed analysts' targets, partly because of the exchange rate, according to Chief Executive Officer Robert Ashe. "It's affected our outlook a little bit because of that squeeze from the foreign currency," Ashe said in a Sept. 28 interview.

European policy makers are signaling growing alarm as the strengthening euro threatens to undermine growth in the 13- nation bloc that shares it.

...Group of Seven

Paulson is likely to hear about that when he hosts a meeting of finance ministers and central bankers from the Group of Seven industrialized nations in Washington next week.

"The euro exchange rate is starting to concern us," Luxembourg Prime Minister Jean-Claude Juncker said Oct. 1. European Central Bank President Jean-Claude Trichet said three days later that "we appreciate" the U.S. government's stated preference for a strong dollar.

Alison Moritz, tending a hot dog stand in San Francisco's Union Square, doesn't seem to agree as she happily watches her tip jar fill up with dollar bills and coins from European tourists.

"Before, they were not known for being good tippers," says Moritz, 23, who figures she's collecting as much as $90 a day at Stanley's Steamers Old-Fashioned Beef Franks. "Now they're throwing in $2 at a time."

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