Finance executives can’t say they weren’t warned. After more than a year of dire announcements that the United States was living beyond its means—and that budget and trade deficits could mean an eventual, sudden decline of the dollar against the currencies of the country’s major trading partners—Federal Reserve chairmanReserve chairman Alan Greenspan set the wheels in motion for a dollar devaluation last November. That’s when he predicted to members of the European Banking Congress in Frankfurt that international investors would eventually tire of financing the burgeoning U.S. budget deficit and trade imbalance.
Deutsche Bank Group chief economist Norbert Walter, who says he was “one of the lucky guys” who heard that Greenspan speech, agrees that “the development of the external debt of the United States over the past three years is unsustainable.” Among the bleaker predictions is that central banks, particularly Asian banks that hold more than two-thirds of the funds invested in U.S. Treasury debt, may wind up pulling the plug at some point during the next several years.
“It’s not something that’s very imminent,” says Walter. “[The central bankers] are not anxious to see their biggest investment downgraded.” But Walter says it may be inevitable, particularly if China, which has its yuan (also known as the renminbi) pegged at roughly 8.3 to the dollar and is judged by forward contract markets to be undervalued by about 4 percent, sees its economy start to overheat. Walter sees that happening “if they get very close to 10 percent annual gross domestic product growth.” China’s GDP is currently running at 9.5 percent.
Despite such predictions, treasury executives of companies doing business in multiple markets are confident that their financial results are relatively immune. Most are hedged against the risk of a falling dollar through financial instruments or other offsetting measures, if they aren’t poised to benefit. Some also consider the risk not nearly as great as pessimists contend. But experts caution that such efforts could fall short if the dollar’s fall is particularly dramatic, and they decline to rule out that possibility.
Consider Honda Motor Co.’s approach. “Honda’s basic policy hasn’t changed,” says Yoichi Hojo, general manager of the finance division of the Japanese carmaker. Hojo expresses confidence in the company’s hedging strategy, if only because it is decidedly conservative. “The objective of the hedging is to secure ourselves but not to profit from the hedging,” he says. “We don’t do any speculative things.”
Observers say Honda’s approach is typical. “The basic philosophy [of multinationals in general] really hasn’t changed” as a result of the dollar’s decline, explains James Hodge, senior consultant for Chicago-based Treasury Strategies Inc. The “better companies,” says Hodge, already have extensive programs in place to limit currency risks, whether through natural hedging such as diversification of markets and suppliers or by means of financial instruments. The two basic alternatives among the latter are forward contracts and currency options, both of which carry a not-insignificant cost for many companies.