[NYTr] New US party line: Weak dollar good, won't be inflationary

[All the News That Doesn't Fit]

Gold Anti-Trust Action Committee
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New party line in U.S.: Weak dollar good, won't be inflationary

Bloomberg News - Oct 8, 2007
http://www.bloomberg.com/apps/news?pid=20601109&sid=acan_4u7wIJI&refer=home

Paulson's Weak Dollar Boosts Growth Without Fueling Inflation

By Matthew Benjamin and Vivien Lou Chen

Treasury Secretary Henry Paulson, whose signature appears on every
new dollar bill, may find the weak currency with his name on it
helps the U.S. economy more than the strong one he publicly endorses.

The dollar's 8 percent slide during Paulson's 15 months in office
is good news on the docks of Long Beach, California, where shipping
containers are making their return trip to Asia filled with U.S.-made
computer, auto and aircraft parts whose prices have become more
competitive abroad. What's more, economists don't foresee the weaker
currency generating higher import prices and accelerating inflation.

"The dollar is in a quasi-sweet spot," says Joseph Quinlan, chief
market strategist at Bank of America Corp. in Charlotte, North
Carolina. "It's dropped enough that it's creating an earnings upside
for U.S. multinationals, while I expect many foreign companies to
hold the line on prices they charge U.S. consumers."

Exports by General Motors Corp., Boeing Co., and other U.S. companies
were up 11 percent in the second quarter from a year earlier,
shrinking the nation's trade deficit in goods for the first half
by $14 billion, to $405 billion, and helping the economy weather
the housing bust.

According to estimates by Goldman Sachs Group Inc., that's the
biggest improvement in 20 years; exports of goods grew more than
twice as fast as imports in the first half of 2007.

..Further Narrowing

The government will report August trade figures on Oct. 11, and a
Bloomberg survey of economists says they will show a further narrowing
of the gap.

Asked how Paulson, 61, views the dollar's recent slide, his
spokeswoman, Brookly McLaughlin, refers to recent statements from
him that reiterate the official U.S. policy since Robert Rubin ran
the Treasury under President Bill Clinton: "I feel very strongly
that a strong dollar is in our nation's interest."

As Treasury secretary, he can't be expected to say anything else,
says Tom Fitzpatrick, global head of currency strategy at Citigroup
Inc. in New York.

"The U.S. needs external capital to fund its deficits," he says.
"So you have to say a strong currency is in your interest, because
if you go the other way, why the hell would anyone want to invest
here?"

At the same time, Paulson has good reason to be privately pleased
with the dollar's decline, says Sophia Drossos, currency strategist
at Morgan Stanley in New York and a former Federal Reserve economist.

..Protectionist Pressures

Noting that Congress is considering sanctions to redress the trade
imbalance with China, she says, "If you are the U.S. administration
and you don't want to see protectionism take hold, what is your
incentive to change anything? It doesn't seem like it's in the
interest of the U.S. Treasury to arrest the decline of the dollar.
They are accepting it as a move based on fundamentals."

The impact of the dollar's weakness is evident at the port of Long
Beach -- the nation's second-busiest behind Los Angeles -- where
exports jumped 34 percent in August from a year earlier.

Larry Cottrill, the port's director of master planning, says the
number of unfilled containers leaving the port dropped 14.5 percent
in August and was down 4.5 percent for first 11 months of the year
ended Sept. 30. That's a turnaround from the last decade, when the
fastest-growing container category was outbound empties, he says.

..Fewer Empty Containers

In the past year, Cottrill says, he's seen a decline in empty-container
shipments "up and down the West Coast."

The cheaper dollar isn't just attracting overseas buyers; it's
luring business to U.S. shores as well. Foreign visitors to New
York City are taking advantage of their increased buying power to
snap up diamonds and gold at Tiffany & Co. stores, helping the
luxury jeweler to its biggest sales gain in seven years during the
second quarter.

In San Francisco, George Chairakakis, a 30-year-old naval architect
from Athens, said last week he bought "20 percent to 30 percent"
more than he'd intended during a 10-day visit.

"I've exceeded my budget because of cheaper prices," he said while
walking through Union Square carrying bags of clothes and shoes.

The demand from overseas is a welcome boost to the U.S. economy as
the two-year housing recession and tighter credit standards threaten
to suppress consumer spending.

..Adding to Growth

Trade added 1.3 percentage points to growth in the second quarter,
the most since 1996 and the first time since 1991 that exports
contributed more than consumer spending to the economic expansion.

"The U.S. is becoming like the old Japan," says Jim O'Neill, head
of global economic research at Goldman Sachs. "Domestic demand is
soft, but exports and fixed investment spending are very strong,
which people have been crying out for from the U.S. for years."

In Schaumburg, Illinois, west of Chicago, Jason Speer of Quality
Float Works Inc. says "'sizzling' would be a perfect word" to
describe demand from China to Mexico for his company's products,
which are used in portable water dispensers and tanks.

He says export sales are up 10-fold since 2003 and represent 26
percent of the firm's revenue, compared with 3 percent four years
ago.

..'Tremendous Opportunity'

"We are getting inquiries on a daily basis from all over the globe,"
says Speer, vice president and general manager. "The dollar is so
weak now that there's tremendous opportunity for manufacturers."

GM, the largest U.S. automaker, will sell $800 million worth of
Buicks and auto parts to its joint venture in China during the next
four years, the Detroit-based company announced last month.

Farm-equipment maker Deere & Co. of Moline, Illinois, predicts
revenue from South America will climb 30 percent this year. Seven
of every 10 commercial planes on Boeing's backlog of orders are
going to foreign markets, up from a third just six years ago.

"Clearly, the dollar hasn't hurt us," says Randy Tinseth, vice
president of marketing for the Chicago-based company.

Meanwhile, his main competitor is suffering as the euro nears record
levels. Toulouse, France-based Airbus SAS faces extra costs of $1.41
billion for every 10-cent increase in the euro against the dollar,
Chief Operating Officer Fabrice Bregier estimates.

..Absorbing the Hit

When faced with a falling dollar, foreign companies tend to absorb
the hit to profits or try to cut costs rather than charging more,
according to a September study by three Federal Reserve economists.

Official statistics support that view. U.S. import prices excluding
fuel were up 2.2 percent in August from a year earlier, compared
with a 2.9 percent rate at the end of last year. The Fed's preferred
measure of inflation, the personal consumption expenditures core
price index, rose 1.8 percent in August from a year ago, the smallest
gain since February 2004 and within Fed Chairman Ben S. Bernanke's
stated comfort zone.

"Even when the dollar is weakening, they don't raise prices in the
U.S.," says Fed economist Joseph Gagnon, one of the paper's authors.
Often, businesses make that choice to defend their U.S. market
share, he says.

..Shifting Production

Rainer Schmueckle, chief operating officer at Daimler AG's Mercedes
Car Group, said at a Sept. 25 press conference that the Stuttgart,
Germany-based company would have to consider shifting more of its
production to the United States if the euro, currently at about
$1.41, were to rise above $1.45 and remain there.

In Canada, whose dollar has risen to near-parity with the U.S.
currency for the first time in 31 years, the biggest software maker,
Cognos Inc., is holding the line on prices even as the exchange
rate eats away at its profits.

Second-quarter license sales at the Ottawa-based company, which
exports more than half of its products to the U.S., missed analysts'
targets, partly because of the exchange rate, according to Chief
Executive Officer Robert Ashe. "It's affected our outlook a little
bit because of that squeeze from the foreign currency," Ashe said
in a Sept. 28 interview.

European policy makers are signaling growing alarm as the strengthening
euro threatens to undermine growth in the 13- nation bloc that
shares it.

..Group of Seven

Paulson is likely to hear about that when he hosts a meeting of
finance ministers and central bankers from the Group of Seven
industrialized nations in Washington next week.

"The euro exchange rate is starting to concern us," Luxembourg Prime
Minister Jean-Claude Juncker said Oct. 1. European Central Bank
President Jean-Claude Trichet said three days later that "we
appreciate" the U.S. government's stated preference for a strong
dollar.

Alison Moritz, tending a hot dog stand in San Francisco's Union
Square, doesn't seem to agree as she happily watches her tip jar
fill up with dollar bills and coins from European tourists.

"Before, they were not known for being good tippers," says Moritz,
23, who figures she's collecting as much as $90 a day at Stanley's
Steamers Old-Fashioned Beef Franks. "Now they're throwing in $2 at
a time."

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