THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, March 20, 1995 TAG: 9503180138
SECTION: BUSINESS WEEKLY PAGE: 04 EDITION: FINAL
SOURCE: Ted Evanoff
LENGTH: Medium: 81 lines
With all the handwringing about the dollar's free fall, you'd think the United States was on the verge of becoming the next Third World nation.
At least that was tone of the message from Wall Street last week after the Commerce Department reported U.S. imports exceeded exports in '94 by $155.67 billion. Paying for the imports released a flood of dollars into the world, pushing down the currency's value in Germany and Japan.
Yes, the weak dollar is a symptom of deeper troubles. But trying to defend the dollar, as the Federal Reserve could do with another interest rate increase, isn't a wise course of action. The low dollar itself, the fact that a banker will give you only 89 yen for your $1, down from 100 yen for $1 three months ago, that's good for the United States.
If you compete with a Japanese company, and the dollar went down 11 percent in value in Tokyo, it means your competitor's costs went up 11 percent in the United States.
That's exactly what has helped Volvo Penta of the Americas Inc. Gasoline-fueled marine engines made by the Chesapeake manufacturer, part of a Swedish company, are exported to 100 nations.
While the Swedish company has only a piece of the outboard engine market, the piece grew when an engine maker in Japan faded in North America. Yamaha's problems included a strong yen that squeezed its profits on sales in the United States and Canada.
If a Tidewater boater pays $4,000 for a Yamaha outboard, and $1 is worth 100 yen, the outboard's price equals 400,000 yen. But at 89 yen to $1, the $4,000 fetches only 356,000 yen, a drop in value of 11 percent in Japan. Yamaha retreated as the yen's strong value compressed profit margins. The yen wasn't the sole reason for Yamaha's retreat, but it was a factor, and it helped Tidewater's economy.
Volvo Penta's Chesapeake headquarters crew grew to 200 last year when the planning, purchasing and product development, departments were moved from Sweden to Tidewater. An engine assembly plant employs 250 in Lexington, Tenn.
``In general terms it will help in your exports if you have a more favorable exchange rate,'' said Lennart Hammarstrom, head of Volvo Penta in Chesapeake.
If the dollar slide continues, Japan faces a choice. Its companies can accept slimmer profit margins on U.S. sales, or set up plants in the states. Or Japan can do what the United States has done: let the value of its currency fall.
For now, most companies in Japan and German are willing to live with slimmer profits, said economist Ken Goldstein of the Conference Board, a New York research organization funded primarily by large corporations.
Just as the dollar gives Volvo Penta an edge over Yamaha, it can give Newport News Shipbuilding, the largest private company in Virginia with 19,000 employees, an advantage over competitors abroad.
``If the dollar were to start to rise, the business world would start wringing its hands,'' Goldstein said.
What's brought the weak dollar into sudden focus isn't a new calamity in the economy. The dollar's value overseas has been declining for more than 10 years.
What brought it into focus was speculators trading in the currency markets, Goldstein said, where more profits can be had at present than in real estate, stocks or bonds.
``The speculators are playing the currency markets at least in one sense because that's the only game left for them,'' Goldstein said.
H. Erich Heinemann, a New York economist and a member of the Shadow Open Market Committee, which watches the actions of the Federal Reserve, scoffed at the gloom surrounding the dollar. The dollar is weak against the yen and the mark, but it's up against the currencies of almost all other trading partners of the United States.
Heinemann, writing in the Journal of Commerce recently, noted: ``The best measure of the dollar is probably the real effective exchange rate index (1990 equaled 100) compiled every day by economists at J.P. Morgan & Co.''
The Morgan index tracks ``the dollar against currencies of 45 nations that make up almost all of U.S. merchandise trade.''
Last week, Heinemann said, ``the Morgan index was at 97.28, down a bit but still in the band where the dollar has traded since 1988. The fact that the real effective value of the dollar has dropped only modestly is the main reason why U.S. import prices have been relatively steady.'' by CNB