After a long slide, dollar on the rebound

A stronger US currency reduces inflation pressures, but American exports could run into head winds.

This fall, as customers shop for imported olive oil and pungent French cheeses at Fairway Market's stores in Manhattan, they will be in for a pleasant surprise: Their prices are coming down.

Lower food prices?

Yes, thanks to a somewhat more muscular dollar, the greenback is up 10 percent compared with other major world currencies in the past month. Some importers, such as Fairway Market, are trying to pass on the savings to customers. The rise of US currency is taking place in large part because the rest of the world is looking at slower growth or, in some cases, even recession.

A more powerful dollar has important implications. It takes some pressure off hedge funds to put money into oil, whose price continues to fall. A stronger dollar reduces some of the inflation pressures, which should give the Federal Reserve the opportunity to keep interest rates where they are.

But a more muscular greenback also means it becomes more expensive for Europeans to buy American condos and beach cottages. And exports of US goods, which have been strong, may run into head winds if the dollar keeps rising.

"The stronger dollar at this point is a net positive," says Scott Anderson, senior economist at Wells Fargo Economics in Minneapolis. "There has been enough depreciation to give us a boost and enough stability to help us on the inflation front."

Before the recent rally, the dollar had fallen about 45 percent from its peak in 2002. The short-term boost means the dollar is now down about 36 percent from that peak.

"If the dollar continues to strengthen, it does open the door for oil prices to move lower," says Jay Bryson, international economist at Wachovia Economics Group in Charlotte, N.C.

On Tuesday morning, the price of oil on the commodities markets fell below $112.50 a barrel, down from a peak $145.85 in early July.

One main reason for the falling price of oil and the rising dollar is the slowing world economy, Mr. Bryson says. For example, the German economy, a powerful engine for Europe, is starting to slow as global investment spending weakens.

"Whereas two months ago some thought the European Central Bank would raise interest rates, now things in Europe are looking pretty shaky," he says. "If anything, interest may be skewered to the downside."

In fact, the Japanese economy appears to already be in recession, says Sung Won Sohn, a professor of economics at California State University, Channel Islands. "Japanese exports are lower than a year ago, and that is the first time that has happened in the [post-World War II] period," Mr. Sohn says. "It tells you how slow the global economy is."

One indication of the change in trade flows to the United States can be seen at California's Port of Long Beach, the second-largest US port. For the past several years, the biggest export there was empty containers, says Larry Cottrill, director of master planning at the port. Now when vessels leave the port, he says, they are carrying more full containers.

"In San Pedro Bay [the Port of Los Angeles and the Port of Long Beach], loaded exports increased 22.5 percent for the first six months of 2008 compared to the same period last year," Mr. Cottrill says. "The stronger dollar will not work its way through until 2009."

In part, this lag with the dollar is because of the long lead times for business. For example, Ransom + Scout, a recently established leather bag company in Santa Fe, N.M., purchased its first shipment of Italian leather in January and then reordered in June. "What we noticed is price increases," says Gary Hahs, managing partner, who was exhibiting the company's decorative handbags at the New York International Gift Fair this week. "The recent strength of the dollar hasn't trickled down yet."

A stronger dollar should help another handbag manufacturer, Murval Paris, says its chief executive officer, Bruno Zerdoun. His company, which manufacturers most of its goods in China, tried to absorb price increases while the dollar was weak, he says. "It was tough not to raise prices," says Mr. Zerdoun, who was also at the gift fair.

Many companies exporting to the US tried to cope with the falling dollar by pricing their goods in US dollars. Now, with the dollar increasing, this helps their profit margins. "It's good for business, bad for shopping in New York," says Tess Lloyd, a designer at Polli, a jewelry firm in Sydney, Australia. The Australian dollar has fallen compared with the US dollar.

Importer and exporter Paul Stewart-Stand of Brooklyn says the relatively weak dollar in June helped him win an order from a British firm for 24,000 collapsible cups. "The sale was driven by the strength of the pound sterling," he says. "With the type of volume we're dealing with, we don't feel a 5 percent change [in currency]."

However, grocer Steve Jenkins of Fairway says the stronger US dollar has helped restore his profit margins on the cheeses and imported foods for sale at his Upper West Side market. "We get 400 to 600 different types of cheeses, and the vast majority are European, from Italian Parmigiano Reggiano to Spanish Manchegos. I suspect we will be able to charge less," he says.

He anticipates the lower prices will also extend to olive oils. "We get 11 private brands of olive oil, plus one store label – all from the Mediterranean basin – not to mention 14 organic brands," he says. "I expect all will be less expensive this fall, even before the new crop is pressed."