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WHO WINS, WHO LOSES
WITH THE WEAKER DOLLAR

For Moog Inc., which sells many of its industrial products abroad, the slumping U.S. dollar turned out to be a $1.6 million bonus for its profits during the first three months of this year.

It's also good for business at the Prime Outlets mall in the Town of Niagara, where Canadian shoppers are finding that the loonie goes a little farther these days.

But the slumping dollar is bad news for Western New Yorkers planning to head off to Canada or Europe for vacation. Those trips are getting more expensive.

It also means that imports from Europe and Canada are going to cost more, ranging from French wine to Italian olive oil to Canadian lumber.

All this because the greenback -- after showing tremendous strength throughout 2001 and into last year -- has weakened, weighed down by rising budget deficits, record-low interest rates and a widening trade gap.

As a result, the Canadian dollar, which hit a low of 62 cents in January 2002, rocketed past the 73 cent mark Friday for the first time since October 1997, making the loonie 18 percent stronger than it was just 16 months ago.

It's a similar story with the euro. At Friday's rates, one euro was worth about $1.15, compared with just 86 cents 15 months ago and 82 cents at the euro's bottom in October 2000.

"Overall, I think it's a very significant change," said James McConnell, the associate director of the Canada-U.S. Trade Center at the University at Buffalo.

But, as with any currency shift, there are nearly as many winners as losers, and the impact of the changes are not always felt immediately.

"The prices of goods take a lot longer to change than the price of money," said Marc Chandler, the chief currency strategist at HSBC Bank USA in New York City.

For U.S. companies that sell their
products in Canada and Europe, the weaker dollar means their goods will cost less, which could lead to stronger exports. Likewise, executives from Canadian and European companies that export goods to the United States have started complaining that the strength of the euro and the Canadian dollar is starting to make their products less competitive in the American market.

Locally, the falling U.S. dollar will make it more appealing for Canadians to cross the border to shop in the Buffalo Niagara region -- and less attractive for Americans to travel north of the border -- but so far, the currency shift has not had a huge impact, local retailers and travel officials said.

"We're seeing an increase" in Canadian shoppers, said Carrie M. Neidig, the Prime Outlets marketing manager. "But it really hasn't been in effect that long. If it stays at this level, it will have an impact."

James L. Soos, the manager of the Walden Galleria, isn't as sure. Even at 73 cents, the exchange rate may not be favorable enough to lure Canadians into taking a shopping trip to the United States.

"The Canadian customer is primarily coming down here for store selection and value," he said. "I don't think that slight of a change is going to drive people to come to this shopping center."

The slumping dollar also is making it more expensive to travel to the 12 European nations that use the euro as their currency, as well as to Canada. But discounts offered by hotels and tourism firms are helping to take away some of the sting, said James Yoerg, a spokesman for the AAA of Western and Central New York.

"Anyone who wants to travel will travel," he said. "It just may cost them a little more."

The shift also has not spurred much additional interest in travel to the Buffalo Niagara region by tourists from Canada and other nations. The Buffalo Niagara Convention and Visitors Bureau hasn't noticed any change in the level of inquiries it's receiving from tourists, although the change in exchange rates may be too recent to be reflected in its data, said spokeswoman Nancy Vargo.

For companies like Moog, which has extensive European operations, the shift in exchange rates works like a pendulum. Where the strong dollar hurt the company's earnings by more than $1 million during the first three months of last year, the weakening dollar boosted its sales by $7 million during the same period this year and added $1.5 million to its profits.

That's why many larger firms try to smooth out currency fluctuations by hedging in the currency markets. Others initially absorb the changes in exchange rates, rather than raise or lower their prices in lock step with the currency markets.

"It certainly affects competitiveness, but we would never raise prices based on exchange rates," said William G. Gisel Jr., chief operating officer at Rich Products Corp., the Buffalo-based food company that also has plants in Canada. "It's the marketplace that sets the prices."

McConnell, however, thinks the slumping U.S. dollar could make it harder for Canadian manufacturers to compete against American firms. "This could be very disadvantageous to Canadians," he said.

That's because labor costs in the two nations are roughly the same when the Canadian dollar is worth about 68 cents, he said. "When the loonie gets above 70 cents, it really puts Canadians at about a 10 percent price disadvantage," McConnell said.

Why is the U.S. dollar slumping? Analysts cite a wide range of factors, from the ballooning federal budget deficit and the yawning trade gap, to interest rates that are at 40-year lows and are below the yields available to investors in many other nations. That makes U.S. bonds less appealing to foreign investors.

"The market is chasing yields," Chandler said.

The yield on a 10-year government bond, for instance, is about 1.4 percentage points higher in Canada than it is in the United States, while the central bank lending rate for overnight loans in Canada is two percentage points higher than it is in the United States.

Economists also worry that the slumping dollar eventually could force interest rates higher in the United States as it struggles to attract the foreign capital it needs to finance widening budget and trade deficits.

"So far, it's the economists' equivalent of a free lunch," said Chandler, who estimates that the United States needs to attract $2 billion in foreign capital each day to keep the dollar from falling. "The weaker dollar isn't forcing U.S. rates higher."

Currency markets also were jolted by last weekend's comments by Treasury Secretary John Snow indicating that the Bush administration, while it still wants a strong dollar, also sees the weakened currency giving the economy a boost by helping exports.

On Saturday, at a meeting of finance ministers from the Group of Seven major industrial nations and Russia in Deauville, France, he described the dollar's 21 percent decline against the euro in the past year as "fairly modest."

Those kind of comments make some currency trades think the administration wouldn't mind seeing the dollar fall even further at a time when the Federal Reserve is unlikely to raise interest rates because of the risk of deflation it cited two weeks ago.

"We'll see the dollar sell off a little further," said Mark Thome, vice president of foreign exchange at Fortis (USA) Financial Markets.

The dollar's weakness, however, has not been across the board, Chandler noted. While down sharply against the euro and the Canadian dollar, the exchange rate is not a factor in trade with China, because that nation's currency is pegged to the dollar. And the dollar is down only slightly this year against other big trading partners, including Japan and Mexico.

Still, McConnell and Chandler both expect the U.S. dollar to remain weak against the Canadian dollar and the euro. "I think it's going to stick for a while, mainly because of the interest rate differences," McConnell said.

e-mail: drobinson@buffnews.com

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