The dollar has been sliding for the past 20 months, as overseas investors, worried about the growing U.S. trade deficit, continue selling off greenbacks. But so far, the decline has been gradual. And that, if it continues, could be good news indeed for U.S. corporate profits. How good? David Huether, chief economist of the National Association of Manufacturers, sees the weaker dollar adding two percentage points, worth $17.5 billion, to earnings growth this year.
Since reaching its recent peak in early 2002, the dollar has fallen 20% against a trade-weighted basket of major currencies, including the euro, the Canadian dollar, and the yen. That's a big plus for exporters: When U.S. goods are purchased abroad, they're paid for in foreign currencies. And those currencies now buy more dollars. U.S. exports will probably post a small rise this year, after two years of decline. But many economists see even stronger export growth next year, of 8% to 10%. That's based largely on expectations of a global economic recovery. However, Nariman Behravesh, chief economist at Global Insight Inc., figures that nearly a third of next year's rise in exports will be attributable to the weaker dollar.
The payoff is already showing up on corporate income statements. Fast-food chain McDonald's Corp. (MCD) gets 58% of its sales outside the U.S. and credits a stronger euro with helping to beef up third-quarter operating income by $48 million, to $964 million. At conglomerate 3M Co. (MMM), more than a third of its $473 million increase in third-quarter sales came from a weaker dollar, says Chief Financial Officer Patrick D. Campbell. That in turn lifted quarterly profits by $8 million. Similar results have been reported by heavy machinery maker Caterpillar Inc. (CAT) and cardiovascular equipment producer Guidant Corp. (GDT).
In time, U.S. companies should also gain pricing power at home from cheaper dollars. Why? Foreign producers typically try to keep prices on their U.S. goods stable when the dollar falls. For a while, at least, they're willing to accept lower profits in exchange for maintaining market share. But "at some point they are going to have to cry uncle and start to raise prices," says Global Insight's Behravesh. When they do, U.S. businesses will likely follow suit.
While an orderly fall in the dollar is good news, a panicked decline would not be. A domestic terrorist attack or a new Mideast crisis could cause a sharp plunge in the dollar. "Unfortunately, [it] doesn't seem that farfetched," says David A. Wyss, chief economist at Standard & Poor's (MHP). For now, though, most economists still see a gradual fall: Wyss sees the dollar ebbing a further 13% against the euro and 8% against the yen over the next two years.
The biggest question about the dollar's future direction is whether China will end the fixed exchange rate for its currency, the yuan. That would allow the yuan to appreciate against the greenback, making Chinese exports to the U.S. more expensive. Some economists believe it would also slow the flood of U.S. factory jobs moving abroad. But while Treasury Secretary John W. Snow has been pressuring Beijing to allow its currency to float, China seems unwilling to give up this competitive edge. No matter. Even without more help, the dollar is likely to continue its slow drift -- putting plenty of green into Corporate America's coffers. By James Mehring in New York, with Michael Arndt in Chicago