NEW YORK, April 30 - The dollar's weakening trend is starting to filter its way into the U.S. economy and help exporters, but could soon cause pain for Europe and Japan during a time of precarious global growth. On Wednesday, Europe's common currency rose to a four-year high against the dollar below $1.12 , and probed three-year lows against the Canadian dollar at C$1.4327 . An increasing number of market analysts see the possibility the European single currency will reach $1.20 by year's end. A weaker U.S. currency is a boon to American-based manufacturers, whose goods become cheaper in overseas markets thus stimulating more competitive sales against their foreign counterparts. A lower dollar also buttresses the profits of U.S. corporations when sales are translated from foreign currencies back into dollars. "From looking at some of the earnings announcements from U.S. manufacturers, U.S. industry is content with the dollar at these levels. We are seeing the fruits of a weaker dollar in these earnings statements," said Jason Bonanca, foreign exchange analyst with Credit Suisse First Boston in New York.
Though the dollar's value has been declining for the better part of a year, U.S. manufacturers have yet to feel the full impact of a weaker dollar. The National Association of Purchasing Management-Chicago said on Wednesday that business conditions contracted in April. But the dollar's fall is being hailed by a key manufacturing group that has previously lobbied the Bush administration against the long-standing strong dollar policy. During the U.S. currency's bull run in the latter half of the 1990s, exporters chafed as cheap goods from Europe and Japan diminished U.S. manufacturers' profitability. "We do welcome this: it will be beneficial to the manufacturing sector over the next year or so," David Huether, chief economist with the National Association of Manufacturers (NAM) in Washington told on Wednesday. "We really haven't seen an uptick yet in exports. It generally takes 18 months or two years for the declining currency to take effect," Huether said, adding that some U.S. corporate earnings have already benefited from repatriated profits that are higher because of the weaker greenback.
WEAK DOLLAR: A WOLF IN SHEEP'S CLOTHING? But a weak dollar does not come without risks. International policymakers have long cautioned that the record U.S. current account deficit -- which exceeds $500 billion and hovers above 5 percent of gross domestic product -- makes the U.S. currency vulnerable to a sharp and prolonged decline. The trade gap mandates that America draw the bulk of international capital flows, some $2 billion per day, according to most analysts' estimates. With U.S. benchmark interest rates far less attractive than those of Europe, investors are unlikely to be drawn by the relatively low rate of return imputed in the dollar's value. "The dollar is suffering from portfolio preferences," said David Gilmore, partner at Foreign Exchange Analytics.
"European and Asian savers are putting less capital to work in the U.S., (as) too low a rate for relative risk and now the falling dollar risks setting a vicious circle in place by generating ever less capital inflows to the U.S," he said. Traders are also convinced U.S. officials are secretly welcoming a weaker dollar to support growth prospects. As such, markets paid little heed to Treasury Secretary John Snow, who said his backing for a strong dollar was unchanged. A weaker dollar naturally means the valuations of other major currencies will rise -- at a time when their proponent countries are less than happy to see their units strengthen. Because euro zone manufacturers are suffering under Europe's austere economic environment, any further strengthening would pose problems for European exports. A sharp rise in the yen is especially unwelcome to Japan, whose monetary officials have turned weakening of the unit into a way of life. During March, the Bank of Japan, acting at the behest of the Ministry of Finance, sold 1.13 trillion yen ($9.5 billion) in order to keep its currency weak. "A stronger dollar would be a lot better for the world economy," argued Carl Weinberg, chief economist at High Frequency Economics in New York, in a research note to clients last week.
"However, this does not seem likely to happen any time soon," he added. "So we should mark up our outlook for U.S. exporters at the expense of exporters in Euroland and Japan."//