Jewish World Review
http://www.jewishworldreview.com | (KRT) BERLIN For Volkswagen, the weaker dollar means buying more parts and building more cars in North America instead of Europe.
For Chrysler, it means a competitive edge when executives try to sell a new line of made-in-America cars in a largely untapped European market.
For Porsche, it may not mean much at all, not even a price hike for U.S. buyers of fast cars.
The euro's steep rise against the dollar has European pundits and policymakers fretting. While the currency climb is a sign that investors hold more faith in the euro, which is just 5 years old, it may threaten the pace of any European economic advances.
The euro was worth about 80 cents two years ago. Now, it has risen from $1.14 in October to more than $1.27 in 2004. And it's expected to continue to rise, many economists think, to $1.40 by year-end.
There are several reasons for the dollar's fall, central to which is the huge U.S. trade deficit. Foreigners have to acquire billions of dollars a month to fund that deficit, and even a little dip in the appetite to hold dollars overseas can send the greenback down and the euro up.
The strength of the euro has prompted politicians from several European Union nations to call for interest rate cuts, which would reduce the demand for euros by making them less profitable to hold and simultaneously stimulate the European economy.
Europe depends far more on exports for growth than does the United States, where consumer spending is king. That makes the euro rise especially painful because it makes European exports more expensive.
Many analysts believe the auto industry will suffer most, although the impact on individual auto companies may be blunted because they've been preparing for such a situation.
Immo Dehnert, a spokesman for Germany-based Porsche, said the company took a beating when the dollar weakened in the early 1990s, and prices rose steeply, gutting a market where Porsche does 40 percent of its business.
"We got in trouble with the weak dollar and learned then that (sales) prices cannot be tied to currency fluctuations," he said. "We are hedged against the dollar through 2007. We will be fine."
Most companies are hedged. That means that while the companies may lose money by holding sales prices steady, they make it back through financial contracts with banks.
Companies try to insulate themselves from currency fluctuations, said Thomas Froehlich, a spokesman for DaimlerChrysler in Germany, and they sometimes take advantage of them.
"We do not make strategy decisions based on currency fluctuations," Froehlich said. "But we had decided to double our production in Tuscaloosa (Alabama) and to see the potential of American Chrysler brands in Europe. A happy side effect is that the weakening dollar will help both of these plans."
In other words, while local-currency labor costs in Germany remain constant as the euro's value rises, the cost of a Mercedes in dollars can go way up. The opposite is true for U.S.-built cars, whose cost in euros falls. A U.S. carmaker may have the luxury of cutting prices in Europe to boost sales or taking a higher profit margin.
As Froehlich noted, "It's a good time to introduce a new American car line here."
Volkswagen's financial spokesman Frank Gaube said the company is terminating Jetta production in Europe and switching it to Mexico, to produce cars for the United States and European markets. He stressed that no European jobs at Volkswagen would be lost in the swap, as workers would be moved to other parts of the business.
In addition, the new Golf 5 will be made in Mexico for the American market, and the company is increasing the number of components bought from the United States. Given the cost of the euro, executives are also planning to bring the Brazilian-produced Fox into the EU.
"The strength of the euro will not affect sales, pricing," Gaube said. "But it would hurt the earnings side, so we relocated our production to the U.S. zone."
Norbert Walter, chief economist for Deutsche Bank in Germany, said such factors could mean the weaker dollar will speed up an American recovery and slow a European one. That has led to calls for the central bank to do something, such as intervene in markets to weaken the euro.
"There is a fundamentalist belief - shared by academics and politician alike - that currency intervention is stupidity," he said. "But we could see action if it rises like many expect, to $1.35 or $1.40."
Perhaps before that. Jean-Claude Trichet, the president of the European Central Bank, left a meeting of the world's top bankers on Monday, saying, "There was a mention by Europe that excess volatility and brutal moves were not welcome and not appropriate. We are concerned. We are not indifferent."
Given the usual oblique statement by central bankers, this was pretty strong language that suggested action may not be too far away.
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