The dollar is having its best year in 17 against the world's major currencies, rising or holding steady against all but three -- the Mexican peso, Peruvian new sol and Lebanese pound.
It's "the currency of choice for global investors," even as the US economy cools and stocks decline, said Neil MacKinnon, senior currency strategist at Merrill Lynch & Co in London. The dollar "is still top dog, almost by default." Many investors are betting the world's largest economy, while slowing, will still outperform Europe and Japan. Their purchases of US stocks and other financial assets helped the dollar rise or hold its ground against 52 of 55 major currencies this year.
Not since 1984, when only Taiwan's currency managed a gain by this point in the year, has the dollar fared as well.
While the gains help finance the US trade gap and ease inflation pressure, not everyone is pleased. US exporters such as Nike Inc and Minnesota Mining & Manufacturing Co complain the strong dollar dilutes their foreign earnings when they bring home profits, and central banks in countries such as Brazil and Taiwan have begun intervening in the foreign-exchange market to try to protect the value of their own currencies.
Optimism that the Federal Reserve's six interest-rate reductions this year will reignite the economy has propelled the dollar's gains, analysts said. Fed policy makers lowered overnight borrowing costs by a total of 275 basis points this year, to 3.75 percent, the lowest rate since 1994.
So far this year, the dollar rose 10.5 percent against the euro to US$0.8535 per euro, 8.2 percent against the yen to ?123.78, and 6 percent against the British pound to US$1.4074 per pound. The currency gained 9.7 percent against a basket that includes those currencies as well as the Swiss franc, Swedish krona and Canadian dollar, reaching a 15-year high last week.
Some companies caution that climb may be too much for the economy's good.
The gains prompted US manufacturers last month to press Treasury Secretary Paul O'Neill to back away from the policy of supporting a strong dollar, arguing that it's made them less competitive abroad.
Jerry Jasinowski, president of the National Association of Manufacturers, said the dollar's 27 percent trade-weighted gain since 1997 is undermining the economy and is responsible for declines in manufacturing.
Nike Inc., the world's biggest athletic-shoe maker, warned that fiscal year 2002 profit will fall because of the dollar's strength, particularly against the euro.
"Higher product costs and the translation of European profits into fewer dollars" cost Nike US$0.33 a share in fiscal 2001, which ended May 31, the company's Chief Financial Officer, Donald Blair, told investors last month. "The dollar impact will be larger" in the June-August period, he said.
Companies including Procter & Gamble Co, Coca-Cola Co, Abbott Laboratories, and HJ Heinz Co. have said in recent weeks that the strong dollar hurt their earnings in the second quarter.
Bank of England Governor Edward George on Monday fueled such concern when he said a strong dollar has a "negative effect on [the] US economy through trade accounts,'' and is boosting inflation in the euro region.
Still, "I don't think Washington is going to do a whole lot" in terms of changing foreign-exchange policy or statements, said Mark Thome, a vice president of foreign exchange at Fortis Financial Markets. "It's highly unlikely." Any sign the administration is backing away from its view on the currency could roil confidence in US financial assets, strategists said.
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