- The Washington Times - Sunday, January 4, 2004

Wehearabout record-breaking declines of the dollar,risingU.S. trade deficits and a retrenchment of inward investment flows. Cassandra-likevoicespointtothe war-caused budget deficit, foresee a growing U.S. dependence on the mercy of foreigners and predict the imminent collapse of the globaleconomy.Though these advocates of negativism are sadly mistaken, it is appropriate to review the key effects of dollar value changes together with an outlook of likely developments in 2004.

Manynumbersare bandied about when it comes to the decline of the dollar. Most frequently cited is the dollar depreciation against the euro, with claimed declines of between 17 and 40 percent, depending on the timing of the crest and trough measurements. Here is the reality of change: When the currency under comparison is less than five years old (the euro was introduced in 1999) everything tends to be a “historic” first. The euro was introduced at an exchange rate of 1 to $1.18 and is now traded at $1.25. The historical shift in value amounts to 6 percent.

This decline has not been uniform against all currencies. It has been highly selective against the yen, the pound and the euro. Against most other currencies in Asia, Africa or South America, there has been little change.

Theorists argue that currency shifts will alter the global flow of trade and investments. These adjustments have been very limited for several reasons: For one, between trading partners where there have not been major currency shifts, there has been no reason for adjustment, since tied currencies have kept trade and investment relations the same.

Second, many firms in the countries exposed to the currency changes have multiyear contracts and plans which take time to adjust. Many of their arrangements are with captive suppliers, meaning with plants abroad which either belong to them or contractors with long-term agreements. Therefore, even if the currency values change, suppliers do not.

Goods are often distributed by independent wholesalers, dealers and retailers. They determine the price of any good by choosing how much of a possible price change to “pass trough” and how much to keep or absorb. Currency declines, which could be expected to lead to lower prices abroad, may mainly lead to higher profits of middlemen, while currency increases might lead to a reduction of their profits. Yet, in both cases, sales volumes might be relatively unaffected.

Most important are the decisions of customers. Buyers decide when and why they want a product, and price may only be a minor issue in making the selection. In the United States, continued strong consumer demand, which is not particularly driven by any “made in the USA” designation, accounts for strong sales of global products. In addition, significant brand preferences keep customers focused on products with only limited sensitivity to their prices. If people would really make their purchases based mainly on price, we would see a major switch of car purchases from Mercedes and Infiniti to brands made in Argentina and Malaysia, reflecting the changes in exchange rates.

So, if trade and investment flows have not changed in the past twelve months, will the big shift come now? A quake-like shift of tectonic plates is unlikely. There will be an increase in U.S. exports and a stabilization of U.S. imports. Investment decisions may be hastened or delayed. The flexibility and adjustment of economies will be important. But the values of relationships which have been built up over decades often make the cost of switching too high.

There always is a supply and demand side to all these flow equations. Central banks and other reserve institutions still prefer holding two-thirds of their currency reserves in dollars, rather than in yen or euro. The U.S. economy is growing fast. Stocks are rising rather sharply, business returns are comparatively solid — and, most importantly, the expectation and the vision are — uniquely — optimistically American.

When it comes right down to it — money is just paper. What really matters is the psychology behind it, the trust, outlook and confidence in the government which has issued the money. An old saying of traders is that “the dogs bark but the caravan keeps moving.” The dollar avalanche predictors should know that there may be ups and downs, but at the end, we’ll be on firm territory again.

MichaelR.Czinkota teaches international business and marketing at Georgetown University.



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