Strong Dollar Could Hurt U.S. Companies

It was a juicy little business — picking and packing apples and other fruit from the fertile soil of north central Washington state's Okanogan Valley.

Interactive Guide to the Economy

The Regal Fruit Cooperative, one of the oldest in the region, did well taking the fruit of its neighboring farms' labor and packing it up to ship around the world.

At least until a few years ago, when the steadily rising U.S. dollar began to chomp away at profits.

Slowly but surely, Regal Fruit and other cooperatives like it in the Northwest began to see profits rot away as costs grew, margins shrank and other countries with cheaper currencies ate up market share for apples, apple juice and other fruits.

After more than 53 years, Regal Fruit is now slated to shut its doors once the final summer harvest comes in — another victim of the dizzyingly strong U.S. dollar.

"The industry is in a freefall right now, in large part because of the strong dollar," said Ray Colbert, interim manager at Tonasket-based Regal Fruit. "Banks are foreclosing, people can't get financing. In 47 years, it's probably the worst I've seen it."

Strong Dollar Not So Fruitful

In the last 18 months the U.S. dollar has risen 12 percent against most major currencies as measured by a Federal Reserve currency index. The index measures all major currencies against the dollar. Last month alone, the index posted its highest value for greenbacks since July 1986.

While the strong currency is a surefire sign that international investors still have faith in the stuttering U.S. economy and its deflated financial markets, it is clearly having a negative impact on American businesses that can't compete with products readily available to consumers at discounted exchange rates.

Interactive Guide to the Economy

"As long as domestic demand was strong, I don't think firms really worried too much about the dollar," said Steve Cochran, senior economist with in West Chester, Pa. "But now, you'll take a sale anywhere you can get it."

It's not just apples and oranges that are being affected by the almighty dollar. On the manufacturing side, auto supplies, textiles, wood and lumber, and plastics are just a few industries struggling under the dollar's hefty gain. And on the consumer side, visits from international tourists are down significantly this year, while Americans are choosing in ever-rising numbers to travel abroad with their golden greenbacks.

A Not-So-Strong Stance?

In the 1990s, the U.S. Treasury Department — first under Robert Rubin and later under Lawrence Summers — developed what market-watchers now refer to as a "strong dollar" policy — an unwritten rule that having a balanced budget, stable interest rates, low inflation and a humming economy were the best way to spark investor interest in U.S. dollar-denominated investments.

That was A-OK by almost everyone when the U.S. economy was churning along and the Nasdaq Composite index was in the 4,000- and 5,000-plus range. Now, with the U.S. economy racking up its worst performance in eight years in the second quarter, and with no one certain about whether growth will rebound or not, it's not so fine, analysts say.

Hot Money Betting on the Euro

"The solution isn't a weak dollar, but it's also not the ever-strengthening dollar policy we've been seeing in recent years," said David Malpass, chief international economist with Bear Stearns in New York. "The best solution, perhaps, is a strong and stable dollar, but no one is asserting that just yet."

Indeed, a growing number of analysts and economists in recent months have begun to wonder just that — whether the economy might be better served by having the U.S. Treasury change its tune and, at minimum, allow the dollar to stabilize at its current level.

Growing Pressure for Change

So far, Treasury Secretary Paul H. O'Neill has held fast on the "strong dollar" policy, indicating that the Treasury will not adjust its policies to alter the value of the U.S. currency in world financial markets.

But there is growing pressure on O'Neill and the Bush administration to do something. Although he has not completely convinced the financial markets that he means it, O'Neill, backed by the White House, has repeatedly insisted that he has no plans to intervene in the currency markets or to talk down the dollar.

For Colbert, 68, who bought his first orchard with $250 of borrowed money when he was 19 and has always been in the fruit business, the strong dollar has hurt him more than anything else.

"Frost, rain, heat — those are things you worry about when you're running an orchard," he said. "It's a wonderful way of life and it's a little risky, but now it's even riskier because of the economics of it," he said. "That was something I never would have anticipated."