Shrinking Dollar Helping Detroit

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For the past couple of years, executives from General Motors and Ford have argued their companies was being undermined by an overvalued dollar that made cars from Asia and even Europe less expensive for American consumers.

Initially, however, the automakers’ complaints seemed to go nowhere as the as representatives from companies such as Toyota mounted a political counterattack and Paul O’Neill, President George W. Bush’s first choice for Secretary of the Treasury, dismissed their complaints as so much whining.

O’Neill, however, has resigned, the growth of the U.S. economy is characterized as sluggish and executives such as GM’s John Devine and Bob Lutz and Ford’s Nick Scheele now have what they wanted — a cheaper dollar. The yen is now 12 to 15 percent more expensive than the dollar and the euro, which is quietly replacing the dollar as a key currency in parts of the Middle East and Asia, has appreciated by more than 20 percent since the spring of 2002. Moreover, the consensus forecast is that the dollar will continue to lose more value until the economic recovery in the U.S. finally picks up some momentum. The decline should be modest but will still put more pressure on companies exporting goods to the U.S. to raise their prices.

Hinting down the dollar

John Snow, the successor to the unlamented O’Neill, went on the Sunday morning talks shows last week and hinted the U.S. dollar was probably overvalued to some degree. The dollar quickly lost additional value after Snow’s appearance and is expected lose even more value while European Union’s central bankers debate a rate increase that would limit the increase in the value of the euro.

Secretary Snow said a cheaper dollar will have a beneficial impact on American manufacturers such as GM, Ford, and the Chrysler Group. Certainly, the Big Three would enjoy a small but welcome respite from the competitive pressure brought to bear by their rivals from Asia and Europe. The drop in the dollar also could begin to limit the market-share growth of some of the Asian and European carmakers.

The change has already had a serious impact on Volkswagen AG, which saw a steep decline in profitability. The Japanese auto industry, which had carefully shielded by the Japanese government, also has begun to feel fallout from the cheaper dollar, which helps make companies such as GM and Ford more competitive in the critical North America.
Analysts in Japan have reiterated recently they expect the earnings of both Toyota and Honda, the most profitable of the Japanese manufacturers, to slip this year because of the new competitive pressure in the U.S. created by the declining dollar.

Moreover, executives from both Toyota and Honda also have said they expect lower profits this year, in part, because of intensified competition in the U.S. and the cheaper dollar.
Nissan’s bold $750 million investment to build large pickup trucks and sport-utility vehicles in the U.S. also has become more of risk for the company since a lot of key parts are coming from Japan and invoiced in yen.

For DaimlerChrysler, meanwhile, the declining dollar is something of mixed blessing. It will help Chrysler but it hurts Mercedes-Benz and Smart, which is probably the reason why the company’s executives always seem conflicted when they talk about dollar-euro trade offs.
Germany’s export-oriented automakers, however, have become adept at hedging against big fluctuations in currency values. Helmut Panke, BMW’s chief executive, recently told BMW shareholders that it really didn’t matter to BMW whether the dollar went up or down.

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