By Paul Pirrotta
The growth of U. S. exports, which has lead the economic rebound of the past couple of years, may be at risk because of a resurgent dollar.
The 2008 economic recession interrupted what had been a strong upsurge in U.S. exports. At the end of 2008, U.S. exports totaled $1.287 trillion but by the end of 2009 had shrunk to $1.056 trillion. December 2010 figures show an increase back to $1.277 trillion and projected quarterly 2011 data show exports reaching $1.400 trillion by end of 2011.
The statistics for Connecticut show a very similar pattern. Exports reached $15.384 billion in 2008, fell back to $13.978 billion in 2009 and shot back up to $16.032 billion by end of 2010. First quarter Connecticut exports totaled $4.238 billion for a projected annualized total of $16.952 billion. More than 100,000 high paying Connecticut manufacturing and service jobs are dependent upon these exports.
Three overall factors account for this accomplishment:
• Demand growth for our products in the key emerging markets of India, Brazil, China, etc.;
• The incomparable ability of U.S. companies to enhance the competitiveness of our products;
• And a weak dollar, which makes our products more price competitive overseas.
While the first two factors seem to be holding firmly, the third component — the dollar — has not been as cooperative. Over the past couple of months, we have seen a rising dollar which has appreciated some 5 percent against the Euro, thus making our products more expensive.
While many banks and economists have complex models to monitor and project foreign exchange (FX) rates, for our purposes we can agree that exchange rates levels between countries result from three primary factors: strength of the underlying economy, interest rates and political stability. A strong domestic economy leads to higher interest rates which would make that currency more attractive to investors than currencies of countries with less vibrant economic activity. However, especially in time of global crisis, the political stability of the U.S. attracts, however temporarily, investments from the entire world and as such strengthens the dollar.
To further complicate the equation, the dollar plays a key role in global trade as our currency has been, at least until recently, the only “reserve” currency. Central banks around the globe would purchase bonds valued in U.S. dollars in addition to assets denominated in their own currency. As such, demand for dollars is not only based on trade but also on monetary policies of the world’s reserve banks.
Fluctuations in exchange rates can be drastic indeed and have a substantial impact on pricing. Consider the following example using the Euro: In 2001, it took 1.25 Euros to equal one dollar while today it takes only .71 Euros. Expressed another way, a U.S. made product costing $500 per unit would have required the Europeans to come up with 625 Euros to acquire it in 2001 where today the same product would only cost 355 Euros.
With our economy still recovering from the great recession, my conclusion is that the appreciation is due to political factors:
The European Union is under substantial difficulty. Budget problems in Greece, Ireland, Portugal and Spain have exposed the weakness of the Union and the inability to control local policies.
The events in North Africa and the Middle East have also resulted in the flight to the dollar.
But simply because the uptick is largely politically motivated doesn’t mean that the dollar may not stay up for long stretches and/or that it may not continue to appreciate. Projections are extremely difficult and unreliable: many banks and companies have lost billions trying to speculate on the movement of currencies and they have a full time staff devoted to monitor these factors and trends.
What should companies be doing?
First, I would suggest that you monitor foreign exchange rates movement more closely and consult expert staff at the FX trading desks of large banks for their take. Some of the steps which companies can take to minimize the impact of the strengthening dollar include:
• Entering into forward contracts which allow a company to fix its costs or revenues in advance for periods usually up to one year;
• Consider sourcing some of their components overseas to minimize costs of production.
• Move production to a foreign country so as to eliminate the dollar from the equation.
• Allow a compression of gross margin to retain clients and market share.
A stronger dollar, especially if sustained over long periods, will impact our exports. It is important that companies begin now to evaluate their alternatives so that they can be ready to meet the competitive challenges such a strengthening would demand.
Paul Pirrotta is president of Paul Pirrotta International in Glastonbury. He writes frequently on international trade issues. Reach him through the company’s website at: http://italy-usatraderep.com/aboutus.html
