Strong Dollar Has a Different Value Today

In most explanations of the thriving U.S. economy--not to mention the ever-bubbling stock market--one major factor is often overlooked: the strength of the U.S. dollar, which has risen roughly 20% against other major currencies in the last year.

The strong dollar makes it easier to buy goods and services from other countries at reasonable prices. Right now, imports at record levels are contributing to low U.S. inflation.

And there’s a double benefit because in many cases the dollars Americans pay for imports are reinvested by other countries in U.S. Treasury bonds and in commercial stocks and bonds. Such investment flows have grown rapidly, reaching $100 billon annually in the last few years, and that has helped keep U.S. interest rates low, which in turn has boosted the stock market.

But are we living on borrowed time?

Some precedents are ominous. In the 1980s, a rising dollar made U.S. products expensive and uncompetitive in world markets. The Reagan administration had to push international agreements to bring the dollar down. But quarrels over currency values grew heated, and after a particularly angry tiff between the U.S. and Germany, the stock market crashed in 1987.

Today, the G7 group of the seven largest industrial nations is debating currency values once again and trying vainly to restrain the dollar--which is up 10% so far this year.

Yet this time it’s different. U.S. companies, while watching currencies warily, are lifting no great outcry against the rising dollar.

Truth is, the world has changed in the last 10 years more than we may know. The dollar reflects an economy strengthened by years of investment by U.S. industry that has borne fruit. The money flows from abroad have added capital that U.S. industry has used to improve its worldwide positions. This is an important point.

But we can gain a better understanding of why the U.S. economy is vibrant if we look at specific businesses. Three examples--a world-leading industrial firm, a new technology industry and a global marketer of agricultural produce--will tell the story.

Caterpillar Inc., the Peoria, Ill.-based maker of construction equipment, has traditionally made half its sales overseas. The company was hurt competitively by the rising dollar in the 1980s, and its executives led U.S. business demands that the government change its currency policy.

Today, Caterpillar is hitting on all cylinders, posting record sales and profits in this year’s first quarter, after a strong year in 1996. The company still gets almost half its $16.5 billion in sales outside the U.S. But it has lessened its exposure to currency fluctuations by manufacturing roughly 25% of its output at plants around the world, in addition to a longtime joint venture in Japan. And it has learned cost allocation and financing techniques that have become available in the last decade.

Caterpillar also streamlined operations in the last decade--fighting an epic battle with the United Auto Workers union to do so. It didn’t downsize, but rearranged work rules and production lines and so it, like many other U.S. companies, has become an efficient worldwide operator.

Electronics, the great global industry of computers, semiconductors, software and network tools, offers a second example of how the world has changed. Even new companies, with technologies that didn’t exist a decade ago, operate on a global basis.

“Customers in Malaysia, India, China want the latest technology. They want to leapfrog the West, not develop along some historic learning curve,” says David Rynne, chief financial officer of Bay Networks Inc., a Santa Clara-based maker of computer networks that gets 35% of its $2 billion in sales overseas.

The strong dollar is less of a factor in most electronics trade because companies typically rely on companies next door or across the world for parts of the manufacturing process. Engaged in constant streams of exports and imports, electronics accounts for 25% of U.S. merchandise trade in both directions.

Also, computer networking is such a new business, Rynne explains, “that our main competitors are U.S.-based companies--[Cisco Systems Inc. and 3Com Corp.]--and face the same currency pressures.”

Blue Diamond Growers, the Salida, Calif.-based cooperative of 3,700 almond growers, sells two-thirds of its $800-million annual crop outside the United States. Growers are worried that the dollar’s value is “creeping up,” says Ian Erridge, head of Blue Diamond’s international marketing. Almond sales got killed overseas in the 1980s when the dollar soared to 3.5 German marks.

But today, growers feel more confident because Blue Diamond has improved its worldwide distribution network in the last decade. And now, with the dollar at 1.73 marks, almond sales are brisk to overseas consumers and candy manufacturers.

The image, and the message, running through all those examples is of industry confidently engaged in global commerce, not the confused U.S. companies of a decade ago, fearful of foreign competition.

“It’s a new era of worldwide business, not the same old game,” says Sven Arndt, professor of economics at Claremont McKenna College.

Sure, there are dangers in the new world. Right now the rising dollar is slowing the growth of U.S. exports, and that could threaten jobs and company earnings and stock prices.

And the weak yen, now 127 to $1, violates a U.S.-Japan understanding reached last year over automobile competition and currency ratios.

Conversely, if the Japanese and European economies pick up speed, those nations could pull some of their investments out of Treasuries, causing U.S. interest rates to rise sharply, notes economist Albert M. Wojnilower of Clipper Group, a New York investment company. That would sink the stock market and could stall the U.S. economy.

But, again, this is not the fearful world of the 1980s. A recovery in Japan and Europe would present opportunity for U.S. global industry, as the rehabilitation of Eastern Europe is doing now.

As to Treasury bonds and interest rates, we see today that the federal budget is nearing balance thanks to the very success of the U.S. economy and the growth of industry here and abroad. A balanced budget will free up capital for U.S. industry.

Today’s world is more interdependent--and more confident. That’s reason enough for the dollar to be strong.