By John Byczkowski
The Cincinnati Enquirer
The recent fall of the dollar against the euro is a twisted good news-bad news joke where the winners and losers aren't so clear-cut.
Marty Piazza, co-owner of Piazza Discepoli Wine & Food Merchants, says the falling dollar is raising the prices of his imported goods.|
(Michael E. Keating photo)
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In the short term, it's good for U.S. manufacturers, because they gain an edge against their European competitors. It's bad for U.S. consumers because it makes some imports more expensive.
In the long term, however, a little inflation might be a good thing, given the Federal Reserve's concern about the possibility of deflation. And it won't be good for U.S. manufacturers and the rest of the nation if the strong euro saps any remaining vitality from the European economy.
"I think it's a net benefit short term for the U.S., but there's question marks - what does this do for the rest of the world? - and that could come back to haunt us," said David Gilmore, an economist and partner at Foreign Exchange Analytics, a currency research firm in Essex, Conn.
Tuesday, the dollar briefly hit its lowest point ever against the euro, the common currency of a dozen European nations. Since March, the dollar has lost about 10 percent of its value against the euro and it's lost about 22 percent against the euro in the past 12 months.
How does this affect prices? Imagine a bottle of Italian wine that cost 10 euros. In March, an American could buy one euro for about $1.05. That means that bottle of wine, priced in dollars, cost about $10.50.
But the stronger euro means that this week, it takes about $1.18 to buy one euro - it takes more dollars to buy the same amount of euros than it did three months ago. That same bottle of wine now costs $11.80.
Importers feel pinch
That effect is already showing up on store shelves in the Tristate, says Marty Piazza, co-owner of Piazza Discepoli Wine & Food Merchants, which sells imported goods at stores in Madeira, College Hill and White Oak. Some of the imports on his shelves are up about 10 percent in recent weeks.
Currencies always fluctuate, Piazza said, and "you build a little room to handle fluctuations. Every time, prices come in a little different, and you try to keep retail prices constant," he said.
But with the sharp rise in the euro, "that room for error has been used up all along the line, from producer to wholesaler to retailer," Piazza said.
The result is higher prices. Some Italian wines are up to $11 a bottle, from $10. A bottle of French Rhone is up to almost $31 from $28. And imported Martelli pasta "went up about 10 percent with our last shipment," he said.
But price effect works in reverse for Europeans. At Post Glover Resistors Inc. in Erlanger, president John Whincup said the rise of the euro has given his company a new edge in the market for industrial resistors, both here in the United States and in foreign markets. A $1,000 resistor that cost 950 euros in March costs about 850 euros today. That effect gives Post Glover an edge against European competitors when competing for business in South America, Whincup said.
"We've just taken one big job in Chile, and part of the reason why we were competitive may well have been the dollar's slide," he said. "A lot of our business here in the states and in South America is in competition with European companies, so it helps us that their products are less competitive against ours."
That's a welcome break in what's been a tough three years for U.S. manufacturers. "We've had to struggle to get every order, and we've been surviving and succeeding well, but it's been a real fight," Whincup said. The decline of the dollar "might take some of the pressure off. We're actually hoping that this starts to make us more competitive in the market here and internationally."
While the decline of the dollar hasn't changed the fact that markets are weak, "anything that helps make us more competitive helps our bottom line," he said.
Dollar was overpriced
The dollar has declined because, like stocks, it was overpriced, Gilmore of Foreign Exchange Analytics said.
"Just as stocks ran up and everyone thought there was a new economy in the U.S. that would end the business cycle, foreign investors plowed savings into the U.S. economy and ran the dollar up," he said.
"Now they're realizing that was a dream, and reality has emerged to be somewhat different. So foreigners on balance are putting less money to work in the U.S." That means they're buying less U.S. stocks and bonds, moving less plant and equipment to the United States and are buying fewer U.S. companies "The spigots have been turned, not off, but down to a trickle," Gilmore said.
The Bush administration has contributed to the decline. Past U.S. administrations have been careful to maintain - at least publicly - that they support a strong dollar, because a strong dollar means a strong U.S. economy.
But three weeks ago, when Treasury Secretary John Snow was asked about the dollar on ABC's news program This Week, he didn't follow that line.
"When the dollar is at a lower level, it helps exports, and I think exports are getting stronger as a result," he said. Currency traders and others viewed that as a retreat from the traditional strong economy/strong dollar party line, and Snow's statements since haven't fully restored confidence.
"If they (the Bush Administration) are perceived as endorsing a weaker dollar, it will feed that vicious circle of selling dollars, selling U.S. assets, selling dollars," Gilmore said.
U.S. economy helped
The decline of the dollar will add about 0.3 percent to U.S. economic growth this year, and about 0.5 percent to inflation, said David Wyss, chief economist for Standard & Poor's Inc.
The effect on inflation won't be stronger because the dollar hasn't fallen as sharply against currencies in Asia, a greater source of imports than Europe. The rise of the euro "really just gets the euro back to where it was four years ago, when we actually thought it was pretty fairly valued," he said.
What concerns both Wyss and Gilmore is what the strong euro could do to an already weak European economy. The European economy is forecast to grow just 1.2 percent this year, half the rate of growth forecast for the United States.
"The U.S. can't achieve (economic) growth rates above 4 percent indefinitely without the rest of the world being in a healthy economic situation," Gilmore said. The U.S. economy won't get a bigger benefit from a weaker dollar "because there's global economic weakness. Japan in particular is stagnating, Europe is beginning to stagnate, and this doesn't help them. If anything, this makes matters worse," he said.
Wyss agreed. "We're worried about Europe, particularly Germany, because they were already looking like Japan. This (the rise of the euro) is going to remove their export growth, which is the one thing they've had going. It's also going to depress prices even more, and we've been getting worried about them getting close to deflation," he said.
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