The Incredible Shrinking Dollar

What does the falling dollar mean for your business?

Don Sadler

March 6, 2008

Between the credit crunch, mortgage meltdown and stock market swoon, there has certainly been no shortage of dramatic headlines in the financial news this year. A little less publicized has been the decline of the U.S. dollar, which has been steadily falling in value against many foreign currencies for the past five years. The American currency is now at its weakest point in a decade, and is trading at record lows versus the Euro.

A weak dollar has many implications for the U.S. economy: higher inflation, higher energy prices and possibly even a return to "stagflation," to name a few. But is the falling dollar bad news for U.S. businesses?

"Calling this development a categorically bad one, as the term ‘dollar weakness' connotes, is wholly inappropriate," says Richard DeKaser, the chief economist for National City Bank, and No. 1 economist in the nation last year according to USA Today.

Good News, Bad News

In general, a falling dollar is good news for companies that export and potentially bad news for those that import. That's because a weak dollar makes U.S.-made products cheaper relative to those produced abroad. "The global competitiveness of U.S. exporters, especially manufacturers, is greatly enhanced," DeKaser says.

"If you've ever considered exploring export opportunities, now is a great time because the falling dollar makes your products more competitive overseas," says John Barrickman, president of New Horizons Financial Group, a consulting firm here in Atlanta. "As the U.S. economy enters a slowdown or recession this year, overseas markets may present growth opportunities you might not have domestically."

The U.S. government offers a number of different programs to help companies enter the exporting arena, Barrickman adds. A good place to start is the federal government's Export Portal at export.gov, which brings together resources from across the federal government to help U.S. businesses plan successful exporting strategies.

More than 239,000 small and mid-sized U.S. companies exported goods in 2006, accounting for a total of $263 billion in trade, according to the U.S. Commerce Department. In Atlanta alone, businesses exported $11.4 billion worth of goods in 2006.

Importers: The Flip Side

While exporters' products may be less expensive in overseas markets than their competitors, companies that import either finished goods sold at retail or raw materials and supplies used in the manufacture of domestically produced goods may face higher prices due to the falling dollar.

"Simply put, the declining dollar makes imports, which now account for a record 17 percent of GDP, more expensive," DeKaser says. "While some of these imports have no direct domestic competition – think bananas, for example – most, like furniture and automobiles, do."

How much import costs will go up depends on whether foreign companies, in their effort to maintain sales, will absorb the exchange rate difference. "Rather than raise prices to domestic importers," Barrickman asks, "will they hold the line on prices and realize smaller profit margins? There's some evidence up to this point, at least anecdotally, that this is what they're doing."

The biggest impact of the falling dollar may be on companies that import raw materials and supplies, Barrickman says. "The combination of the falling dollar and strength in the world economy is driving up these costs for U.S. businesses, and this will have a greater impact on their bottom line, especially if they can't raise prices." Meanwhile, foreign competitors' raw material and supply costs may be going down if their currency is stronger than the U.S. dollar, giving them a competitive advantage.

The best example of this is oil, Barrickman notes. "One reason for the soaring cost of oil is that it's priced in dollars. If you're a U.S. manufacturer and energy is one of your key components, your cost of energy has gone up significantly but your foreign competitors aren't bearing a similar increase."

Analyzing the impact of the falling dollar on U.S. businesses isn't as simple as "exporters win, importers lose," however. For example, companies that manufacture and sell goods domestically may have opportunities to raise prices if they're facing less foreign competition from a price standpoint.

"The higher price of imported goods may give domestic producers greater latitude to increase their own prices," Barrickman explains. "Foreign manufacturers must either absorb the incremental cost of selling in the U.S. or raise their prices. But domestic companies won't be under the constraints they've had the past few years in their ability to raise prices due to foreign competition."

It's important to note that the dollar's decline is not uniform in relation to all foreign currencies. "It tends to be more significant against nations with floating exchange rates, like the U.K., Canada and Australia, than against those that manage their exchange rates, as most of the Asian economies do," DeKaser says. "So the impact really depends on which nation you're doing business with."

Effects on Monetary Policy

The wildcard in all of this, according to Barrickman, is how much the falling dollar creates inflationary pressures, which constrain the Fed's ability to combat a slowing economy by lowering rates and might even force the Fed to raise rates. "This could have the greatest impact of all, especially on business that are highly leveraged."

DeKaser believes there's every reason to expect the weaker dollar to continue to boost foreign trade in the year ahead. "Importers and exporters are often bound by sales agreements in the short term, and may hedge the risk of currency movements with various types of derivatives. But the farther the dollar declines, and the longer it persists, the more these short-term palliatives diminish."

How is your business effected by the value of the dollar? Check out our Catalyst Community Forums to find out what other small business owners are doing.

Photo courtesy of © Greenstockcreative | Dreamstime.com

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The Incredible Shrinking Dollar

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What does the falling dollar mean for your business?

Don Sadler

March 6, 2008