Euro Eclipses the Dollar

The almighty dollar has taken a bit of a beating in recent weeks, but currency watchers on both sides of the Atlantic consider the euro’srally this year minimally disruptive and in some ways advantageous.

The parity of the euro against the dollar created immediate benefits for U.S. companies doing business in European markets using the euro — those euros are simply worth more in dollar terms — and, if sustained at or near a dollar-per-euro exchange, could translate into better export opportunities for U.S. firms.

"Companies with a multinational presence, who export merchandise and translate profits back to U.S. dollars, stand to benefit the most," James Glassman, an economist with Chase Securities, said.

Additionally, a more level ratio would help to lure more European tourists to the U.S., especially if fears of additional terrorist attacks abate as the anniversary of the Sept. 11 attacks approaches and passes.

"Certainly in L.A. and New York, the main cities, there is a lot of business coming from tourists," said Marc Bohbot, president of Vernon, Calif.-based Bisou-Bisou, which operates 10 stores in addition to its contemporary wholesale business. "I’m sure it’s the European who is realizing how much cheaper it is to buy in America since the euro is getting stronger and stronger. I think this fall we’ll see a development of exporting again to Europe because of our better prices."

Even the downside seems limited, according to manufacturers, retailers and financial sources interviewed by WWD. While the cost of European goods stands to go up, increases are likely to be limited and focused on luxury and better merchandise, where price resistance is historically lowest.

As Vittori Giulini, president of Sistema Moda Italiana, a consortium of more than 1,500 Italian textile and fashion companies, pointed out: "If a person has already decided to spend upwards of $1,000 on an Italian suit, a 10 percent increase is not going to make a difference in the end."

On Friday, a euro was worth $1.01, 15 cents more than it fetched in January 2002, when it was worth 86 cents. So what does that mean for U.S. buyers? If an order of Italian merchandise cost 100,000 euro in January, a retailer paid around $86,000. As last week ended, that same order would have cost $101,090.Gianluigi Mandruzzato, an economist from Italy’s Intesa BCI, said: "Obviously a weaker euro is not an advantage because it reduces the competitiveness of Italian products in the market. However, the dollar has been losing ground since March and the effect on exports has been less negative than we expected."

Peter Boneparth, president and chief executive officer of Jones Apparel Group, shrugged off the effect of the shifting currency picture. "There’s no material impact of any sort," he said. "Although our entire business is dollar-based, on the supply side, there’s enormous excess capacity, and we would expect any fluctuations of the dollar to be offset by the current excess capacity offshore."

A spokesman for Wal-Mart Stores said that fluctuation in the euro "is not an issue with us at this point." Asda, Wal-Mart’s grocery chain in the U.K., "has performed well and continues to perform well because the pound is strong."

Todd Slater, retail and apparel analyst at Lazard Frères, noted: "As the dollar declines, sourcing costs will be negatively impacted, especially raw materials." However, he pointed out that, in Asian markets, there is a substantial amount of excess production, allowing attractive manufacturing deals to blunt the effect of currency fluctuation. Vertically integrated retailers — such as Gap, The Limited, Ann Taylor, American Eagle Outfitters and Abercrombie & Fitch — are likely to be more affected than those like Wet Seal and Pacific Sunwear that purchase branded goods from vendors.

"It will affect the tourists and travelers," said Linda LoRe, president and ceo of Frederick’s of Hollywood, the 175-unit chain. "We don’t have a big international business and we don’t really have any European manufacturing, so it’s not going to have a huge impact on us in particular. I do think that it affects the traveling economy, and that affects retailers. It’s certainly not good for the country and for business in particular. But we’re not as impacted as others might be."

Economists tend to view the swing away from the dollar as cyclical. John Lonski at Moody’s Investors Services observed that, even though the dollar has dropped by nearly 12 percent year-to-date compared with the euro, it’s still 15 percent stronger than it was at the end of 1998, indicating it might have become overvalued. Also, the last time the dollar fell, during the mid-Nineties, bottoming out in 1996, U.S. corporations saw good earnings growth.At worst, the withering of the dollar could decelerate the price deflation so evident in the apparel markets in recent years. "The exchange rate put the rest of the world on sale for U.S. consumers," Lonski said.

In fact, on Friday, as the stock market headed below its post-Sept. 11 lows, Lonski and his associates at Moody’s issued a report that quantified recent swings in trade, noting that U.S. exports averaged a 0.8 percent increase during the first five months of 2002. However, imports, which declined last year, have surged ahead an average of 2.5 percent a month so far this year, and the average monthly trade deficit, $31.6 billion during the first quarter of this year, could balloon to a record $37 billion during the second quarter.

"According to this measure, the widening of the U.S. trade deficit from the first to the second quarter of 2002 will be the most pronounced ever," the Moody’s economist wrote. "The recent swelling of the U.S. international trade deficit shows that dollar exchange rate-depreciation is not without fundamental justification. Moreover, the year-to-date’s unexpectedly robust recovery by imports is testimony to a faster pace of domestic spending in the U.S.

"In other words," Lonski commented, "a declining dollar may not be the offshoot of a pronounced weakening of the U.S. economy."

It wasn’t that long ago that euro/dollar parity was reached from the opposite direction. When the euro was introduced in 1999 as the official currency in 11 of the 15 European Union member states — the U.K, Denmark, Sweden and Greece chose not to take the plunge with the rest of the E.U. — it fetched $1.17 in U.S. dollars. In late January 2000, the currency sunk to parity with the dollar and then below, averaging as little as 83 cents late that October. Last week, though, the two currencies were on par and the dollar, once again, slid to the narrow side of the exchange.

Among the reasons for the euro’s weakness, according to Standard & Poor’s chief economist David Wyss, was that "no one trusted the European Central Bank, and financial returns were better in America. But recently, financial returns in the U.S. haven’t been looking all that hot, and the Fed[eral Reserve] has probably lost a little bit of credibility, while the Central Bank is probably gaining some."He attributed most of the dollar’s weakness, though, to lagging investor returns in the domestic equity and bond markets. The Standard & Poor’s 500, one of the broadest measures of the equity market, hit a new five-year low Friday, ending the week at 847.76 points, down 26.2 percent since the beginning of the year.

Similarly, the Dow Jones Industrial Average and Nasdaq Composite Index both hit new 52-week lows on Friday. The Dow dipped to 7,966.72 before closing just above the 8,000 mark at 8,019.26, down 390.23 or 4.6 percent. The Nasdaq went as low as 1,309.94 before ending the session at 1,319.15, off 37.89 or 2.8 percent.

"We got an extra kick on the dollar after Sept. 11 because people were just looking plain scared and looking for some place to park their money," he said. That overriding need for security isn’t as prevalent now, 10 months after last year’s terrorist attacks rocked the world’s financial markets.

"The fat years have run out," said Wyss of the dollar’s performance since the early Nineties. "We’re now going to get leaner and meaner."

Currencies tend to run in seven-year cycles, and the dollar’s recent weakness may indicate the down side of the process, he said. The strength of the dollar, though, isn’t necessarily a reliable barometer of how the U.S. economy will perform. "We should be doing better on the export front, but it probably means a little inflation’s ahead and it’s going to be a lot more expensive to visit Europe next year."

Ken Goldstein, an economist with The Conference Board, said the currency fluctuations is a temporary change, "the story du jour," since the U.S. economy is gradually moving toward a 3.5 percent rate of growth compared with perhaps a 2.5 percent rate for Europe. "The U.S. economy over the next several years is going to run hotter than the European economy," he said. "That suggests that the dollar remains significantly above the euro and will do so for a considerable amount of time as it becomes more clear that there is nothing fundamentally wrong with the U.S. economy."What I believe is a greater threat to the ‘Made In Italy’ label is a volatile U.S. stock market, dwindling consumer belief in the U.S. economy and, of course, corporate scandals," said Gaettano Marzotto, president of the trade organization Pitti Immagine.

Michele Norsa, general manager of Marzotto’s apparel division and Valentino’s ceo, said: "This is not far from what was expected by economists initially, because the euro had been undervalued in the last 12 to 18 months. Things are balancing out."

Norsa added that the firm is waiting until next year, when pricing will be evaluated and, of course, exchange rates will be an important part of the equation.

Meanwhile, a spokesman for Gucci Group said that the luxury house wouldn’t be able to gauge the full effect of the swings in the euro until it issues its second-quarter and first-half earnings and sales results at the end of September. "We report in euros and, in any case, all companies do some hedging to protect themselves from the currency variations," he said.

"Obviously, we are not happy about the dollar’s performance, but we want to remain positive," said Massimiliano Zegna Baruffa, ceo of textile giant Zegna Baruffa, which does 40 percent of its business in the U.S. "It will be difficult to maintain the euro price and we’re evaluating whether we’ll need to increase our prices to offset the drop.

"If the dollar were to lose even more ground, it would be very costly for us," he added.

As Vittorio Missoni, financial and marketing manager of the family-owned Missoni firm, commented: "We are not increasing our prices, which we’ve actually focused on keeping in line recently. We don’t buy any raw materials in areas that use the dollar. Italian yarns, however, are priced in dollars, so there could be some advantages in that sense.

"I see this as a transition moment," he concluded. "It’s not traumatic."