Few seeing usual benefits of rising dollar

By Mary Jordan and Karla Adam
Washington Post
Saturday, November 1, 2008

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/31/AR200810...?

LONDON -- The value of the U.S. dollar has soared with unheard-of speed against many currencies in recent weeks, but the global financial crisis has altered the usual effects of such a spike.

Normally a rising dollar means more Americans traveling abroad and foreign countries exporting more goods and services to the United States. But this time, even though the dollar has gained about 25 percent against the euro and the British pound since early August, few analysts said they expect to see that happening anytime soon.

As Americans face recession and rising joblessness, fewer are tempted to take overseas vacations or buy more imported goods. "In an ideal world, the soaring dollar sounds wonderful" for British exports, "but quite frankly no one is buying anything from anyone," said Howard Wheeldon, senior strategist at BGC Partners in London.

At the same time, the speed of the climb has brought debt problems almost overnight to many struggling countries. Foreign governments and individuals who borrowed in dollars are finding that the corresponding rapid decline of their currencies against the dollar has made it harder, and in some cases impossible, to buy enough dollars to keep up loan payments.

The International Monetary fund's emergency talks, including those with Iceland, Hungary and Ukraine, have largely involved nations whose banks are facing huge amounts of unpaid debts that are driven in part by the mismatch of local currency income and foreign currency debt. Also, the euro has risen against Eastern European currencies.

In Ukraine, where the hryvna has fallen to its lowest value since coming into use in 1996, so many people have rushed to convert their savings into dollars that many exchange offices ran out. About $3 billion worth of local currency has been turned into dollars and euros, according to Sergiy Kruglyk, a spokesman for the National Bank of Ukraine.

The dollar has strengthened significantly against the Indian rupee, the Polish zloty -- nearly every currency except the Japanese yen.

While it may not make U.S. consumers rush out and buy cheaper imports, analysts said it may make U.S. exports even harder to sell, because the strong dollar tends to make them more expensive to foreigners. Also, tourists may be less tempted to visit the United States -- already there are signs that Canadians who frequently shopped in U.S. border cities are staying home because goods are suddenly far pricier for them.

Like gyrations in world stock markets, the speed and unpredictability of currency fluctuations have caught many by surprise. "We have really not seen volatility of this magnitude -- it's jaw-dropping," said George Davis, chief foreign exchange analyst for RBC Capital Markets in Toronto.

Analysts attribute the rise of the dollar to a combination of factors, including that investors in hard-hit emerging markets are increasingly selling local shares and retreating into dollars, which are still widely seen as safer than most currencies.

Alex Dunn, senior account manager at Caxton FX, a foreign exchange firm that has seen a 400 percent surge in transactions, attributed the rush to the dollar to the idea that while "America led us into the global recession, they will lead us out."

Wheeldon offered a similar view. "When people think, 'Where should I put my money?' and they see things like Iceland's currency falling off the cliff, they say, 'Well, you have to put your money somewhere, why not the U.S. dollar?'"

In India, another country seeing its currency's value dwindle against the greenback, Rajesh Jain, vice president of Indian brokerage firm SMC Global Securities, said that the new rates are throwing out textbook concepts that the health of a currency generally reflects the health of its economy.

"Today's stronger dollar runs counter to all the widely held economic theories. There is so much volatility, everything is in a state of flux. What we are seeing is not related to reality."

Thomas Huene, economist for the Federation of German Industries, said that even though the euro falling against the dollar should bring good news for German cars and other exports, that may not happen. With the U.S. economy contracting, he said, "the new exchange rate may prove to be just one drop in the ocean."

China's yuan is pegged to the dollar, so Chinese companies are protected against rapid currency swings in their dealings with the huge U.S. market. Though the dollar's appreciation can undermine their goods' competitiveness in non-dollar markets, it helps them import supplies from such places for manufacturing. In sum, most exporters, settling their contracts in the U.S. currency, have welcomed the dollar's rise.

But some are not counting on the dollar's bounce to last long and are trying to get their clients to shift their payments over to other currencies. "The rise of the exchange rate is temporary, like a momentary recovery of consciousness just before death," said He Fan, an international finance researcher at the Chinese Academy of Social Sciences.

In Argentina, the peso's fall is contributing to fears of another national debt default; when Comercial Mexicana, a retailing company that operates the Costco chain in Mexico, filed for bankruptcy protection last month, it cited $2 billion in losses related to the fall of the Mexican peso.

Simon Bradley, an executive vice president of Visit Britain who is based in New York, said, the pound's drop against the dollar "has been so sudden, consumers are waiting to see if this is real."

If the pound stays at around $1.60 to dollar, rather than the long-time range of over $2, he said, the national tourist agency will incorporate the favorable exchange rate into its January advertising campaign to try to lure Americans to Britain.

Many Americans living abroad, including Carl Wheeling, 68, who spent 30 years in the U.S. Navy, are already enjoying the sudden heft of the dollar. His pension check arrives in dollars in Soham, a town north of Cambridge, England, and it's now "kind of a relief" to cash it into pounds. "It's significant, no doubt about it."

When the pound peaked against the dollar in November 2007, it took $2.11 of his pension money to buy a single pound. Thursday it required just $1.63.

In Paris, analysts said the rise of the dollar is so far too recent and tenuous to have a substantial effect on tourism and exports. But they agreed that whatever stimulation the rate change might provide has thus far been eclipsed by the financial crisis and its effect on consumer psychology.

Philippe Marion, marketing director for the Barton and Guestier wine-exporting firm in the Bordeaux region, said that most wine export contracts are drawn up with an exchange rate fixed over an agreed time, such as three months or a year. As a result, the recent shift in the euro-dollar rate has not taken hold in wine sales.

In any case, Marion explained, the overriding factor for Bordeaux-region wine exporters is that economic worries in the United States have for the past several months already cut deeply into high-end exports.

Paul Roll, general director of the Paris Tourism and Convention Office, said tourism has not yet seen an impact. "The real question is for the year 2009," he said.

For the time being, however, tourists seem few and far between. A double-decker tourist bus pulling into Place Saint Michel on the Left Bank on Tuesday, for instance, had only four passengers. But those American tourists who did show up expressed satisfaction at seeing their dollars go a little further to underwrite the traditionally high prices of Paris.

"It's wonderful," said a New Jersey woman at the entrance to the Sainte Chapelle, the tiny 13th-century church famous for its stained glass windows.

Correspondents Edward Cody in Paris, Ariana Eunjung Cha in Shanghai and Rama Lakshmi in New Delhi and special correspondent Shannon Smiley in Berlin contributed to this report.

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