Europe calmly looks at sliding dollar
Staff and agencies
15 December, 2006


By DAVID McHUGH, AP Business Writer Sun Dec 3, 5:04 AM ET

BERLIN - With the European economy on the upswing, companies and governments are shrugging off the dollar‘s renewed slide against the euro this week — a phenomenon once dreaded as potential poison for the continent‘s many exporters.

The euro reached $1.3257 in European trading Thursday, up from $1.3156 in New York late Wednesday, a 20-month high. The pound hit $1.9644, its strongest since September 1992, with analysts saying the British currency could reach $2 by the end of the year.

"I am not concerned," said Dutch central bank head Nout Wellink. Bernd Pfaffenbach, Germany‘s deputy economics minister, said the stronger euro "reflects the strength of the European economy" — but conceded it was not particularly helpful for exports.

Reasons for the calm are several. Many companies have at least some production in the United States, eliminating exchange rate issues for products sold in the world‘s largest economy, while others have limited their exposure to currency swings through complex hedging deals.

"People have gotten used to the stronger euro," said economist Christian Dreger at the German Institute for Economic Research in Berlin. "That is the difference from two years ago."

The stronger euro also reduces inflation by making imports cheaper, Dreger added. That in turn reduces the need for the European Central Bank to continue with its interest rate increases, which fight inflation but can dampen growth.

Economists say the large U.S. trade and budget deficits are putting long-term pressure on the dollar. The most recent dollar slide accelerated after comments by ECB head Trichet in October that the bank might need to raise its key rate from 3.25 percent to combat inflationary pressures from an increasing money supply. At the same time, expectations have grown that the U.S. Federal Reserve Federal Reserve may cut interest rates sometime next year.

Major companies have made only muted comment on the exchange rate, another contrast with 2004 when some businesses cited the strong euro as a partial excuse for lower-than-desired earnings. Automaker DaimlerChrysler AG cited its strategy: "We protect ourselves against currency fluctuations in order to make possible a reliable planning foundation for our business units." Porsche AG, which relies heavily on U.S. sales, says it has hedged a full three years ahead.

Likewise, Munich-based luxury competitor BMW makes its X5 sport utility vehicle and Z4 roadster in South Carolina — paying costs in dollars and exporting some of them back to Europe, where they take advantage of the exchange rate by earning pricey euros.

Not only that, but Airbus parent EADS faces a squeeze between its costs — paid in euros — and its revenues, since international practice is to price jetliners in dollars. The dollar‘s weakness has only added to its financial squeeze as European Aeronautic Defence and Space Co. struggles to launch a new mid-sized jet program while coping with a two-year delay in its A380 jumbo jet.

Economists say the general acceptance could change if the euro hits $1.40 or $1.50 next year, or if the slide moves so fast that businesses can‘t adjust.

Until then, many companies are taking the attitude of Italy‘s Luxottica Group SpA. Even though more than 70 percent of its manufacturing is done in Italy, the world‘s largest manufacturer and retailer of eyewear said its business in the United States nearly equals its U.S. costs.

About 70 percent of Luxottica‘s revenues are generated in the U.S., where it operates 4,500 Sunglass Hut, Pearle Vision and LensCrafters stores, while 65 percent of its costs are in U.S. dollars. Although the exchange rate shrinks U.S. earnings when they‘re translated to euros, profit margins aren‘t affected.

"Most of our dollar revenue is hedged because a similar portion of our costs are in that currency," said spokesman Luca Biondollilo. "At the end of the day, we have a natural hedge."

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