Europe Feeling More At Ease With Weaker Greenback

Recent dollar softness no cause for alarm, many companies say.

BERLIN (AP) - With the European economy on the upswing, companies and governments are shrugging off the dollar's renewed slide against the euro this week - a phenomenon once dreaded as potential poison for the continent's many exporters.

Companies appear to have made their peace with a stronger currency for the time being, especially in export champion Germany, helped by stronger growth at home, currency hedging and increasingly globalized production practices.

The euro reached $1.3257 in European trading this week, a 20-month high. The pound hit $1.9644, its strongest since September 1992, with analysts saying the British currency could reach $2 by the end of the year.

Stronger currencies hurt a country's exports by making their goods more expensive in foreign markets. But European policy makers - except for the French - have issued a large, collective yawn.

''I am not concerned,'' said Dutch central bank head Nout Wellink. Bernd Pfaffenbach, Germany's deputy economics minister, said the stronger euro ''reflects the strength of the European economy'' - but conceded it was not particularly helpful for exports.

European Central Bank President Jean-Claude Trichet, who decried the dollar's slide in 2004 as ''sudden and brutal,'' did not bother to try to try to talk the euro down. He declined comment on the exchange rate after a speech Wednesday.

Reasons for the calm are several. Many companies have at least some production in the United States, eliminating exchange rate issues for products sold in the world's largest economy, while others have limited their exposure to currency swings through complex hedging deals.

Stronger economic growth, with the countries that use the euro expected to see expansion of 2.6 percent this year over 1.4 percent in 2005, reduces the pain as people remember that predictions of doom when the euro hit its record $1.3667 in December 2004 did not come true.

''People have gotten used to the stronger euro,'' said economist Christian Dreger at the German Institute for Economic Research in Berlin. ''That is the difference from two years ago.''

He pointed out that in late 2004, the dollar had completed a dizzying two-year slide from its abnormally high levels in 2000-2002, while the current drop is relatively modest, with the euro rising from levels around $1.25 for much of the year.

The stronger euro also reduces inflation by making imports cheaper, Dreger added. That in turn reduces the need for the European Central Bank to continue with its interest rate increases, which fight inflation but can dampen growth.

In any case, European policy makers can do little about the exchange rate except live with it, since rates are determined on the world's trillion-dollar-a-day currency market, blown by the whims of fear and greed. Or, as U.S. Treasury Secretary John Connally once famously put it, the dollar is ''our currency and your problem.''

Economists say the large U.S. trade and budget deficits are putting long-term pressure on the dollar. The most recent dollar slide accelerated after comments by ECB head Trichet in October that the bank might need to raise its key rate from 3.25 percent to combat inflationary pressures from an increasing money supply. At the same time, expectations have grown that the U.S. Federal Reserve may cut interest rates sometime next year.

Higher rates in Europe relative to the U.S. drive the euro up by increasing the yield on some euro investments.

Major companies have made only muted comment on the exchange rate, another contrast with 2004 when some businesses cited the strong euro as a partial excuse for lower-than-desired earnings. Automaker DaimlerChrysler AG cited its strategy: ''We protect ourselves against currency fluctuations in order to make possible a reliable planning foundation for our business units.'' Porsche AG, which relies heavily on U.S. sales, says it has hedged a full three years ahead.

Perhaps more importantly, DaimlerChrysler and many other companies can take advantage of so-called ''natural'' hedging. Its U.S. Chrysler arm and truck production pay costs and reap sales alike in dollars - eliminating currency swings.

Likewise, Munich-based luxury competitor BMW makes its X5 sport utility vehicle and Z4 roadster in South Carolina - paying costs in dollars and exporting some of them back to Europe, where they take advantage of the exchange rate by earning pricey euros.

The one exception to the calm in Europe is France, where Finance Minister Thierry Breton urged ''collective vigilance'' over exchange rates. France is facing a presidential election this year, with a zero-growth economy in the third quarter.

Not only that, but Airbus parent EADS faces a squeeze between its costs - paid in euros - and its revenues, since international practice is to price jetliners in dollars. The dollar's weakness has only added to its financial squeeze as European Aeronautic Defence and Space Co. struggles to launch a new mid-sized jet program while coping with a two-year delay in its A380 jumbo jet.

Economists say the general acceptance could change if the euro hits $1.40 or $1.50 next year, or if the slide moves so fast that businesses can't adjust.

Until then, many companies are taking the attitude of Italy's Luxottica Group SpA. Even though more than 70 percent of its manufacturing is done in Italy, the world's largest manufacturer and retailer of eyewear said its business in the United States nearly equals its U.S. costs.

About 70 percent of Luxottica's revenues are generated in the U.S., where it operates 4,500 Sunglass Hut, Pearle Vision and LensCrafters stores, while 65 percent of its costs are in U.S. dollars. Although the exchange rate shrinks U.S. earnings when they're translated to euros, profit margins aren't affected.

''Most of our dollar revenue is hedged because a similar portion of our costs are in that currency,'' said spokesman Luca Biondollilo. ''At the end of the day, we have a natural hedge.''

More in Supply Chain