Currency Swings Tricky For U.S. Exporters

The dollar has risen in recent months, especially against the euro. Currency traders say it has to do with something called the carry trade, which is also pushing up the yen. These wild fluctuations in currency values make life a lot more complicated for U.S. exporters.

STEVE INSKEEP, host:

Just like the stock market, the value of the dollar has been moving dramatically. And yesterday, it had its biggest drop in more than 13 years. In the past few weeks, the dollar had been climbing against virtually every world currency. To find out why this is happening and who's affected, we sent NPR's Jim Zarroli to a currency trading office in Manhattan.

JIM ZARROLI: The first thing you notice in the currency room at Brown Brothers Harriman are all the traders staring with grim concentration at their computer screens. Then you see the giant digital sign on the wall flashing the latest trades in red and green letters. When a business or a big investor wants to exchange yen for euros, or dollars for pesos, this is where the transaction is carried out. Lately it's been a wild ride.

Ms. MEG BROWN (Vice President of Foreign Exchange Research, Brown Brothers Harriman): Right now, we've gone through a financial crisis that we haven't had in a half a century.

ZARROLI: Meg Brown is the firm's vice president for currency strategy.

Ms. BROWN: The risks are much higher. The swings are much wider than usual. I came in a couple of days ago and the Australian dollar had fallen eight percent, eight percent in 24 hours. That's a long way to go.

ZARROLI: Brown, who is no relation to her firm's founder, arrives on the floor at 4 a.m. each day. Here she studies currency flows, sifts through rumors, and tries to gauge the impact of world events on the markets. The most dramatic development in the markets right now has been the steady rise of the Japanese yen against every major currency. Brown says it's due to what's called the yen carry trade. She says interest rates have been very low in Japan for year, so investors would borrow money there cheaply and invest it elsewhere.

Ms. BROWN: So you can borrow at half a percent, and you could go to, say, Australia or New Zealand and you could invest at say eight percent, or you could go to Brazil and invest at 13 percent.

ZARROLI: So that sounds like a good investment.

Ms. BROWN: Carry trades are risky. You're locking in this interest rate, effectively. You're borrowing at, say, one percent and lending at eight. So you're netting a seven percent return. Currency markets, though, can move. I mean, as I said earlier, the Australian dollar dropped eight percent in one day. So if you were earning seven percent on an annual basis and suddenly the currency you are holding fell eight percent, you actually are losing money on your carry trade.

ZARROLI: What's happened now, she says, is that investors have grown scared about the economy, so they're selling assets all over the world and paying back the money they borrowed in Japan. So much money is flowing back into Japan that it's caused big demand for the yen, and the yen has risen. And the same thing has been happening, she says, to the U.S. dollar. The Fed lowered interest rates early on in the crisis, well before European central banks. Foreign investors borrowed dollars. Now they're paying them back, and the dollar is soaring.

Ms. BROWN: It's almost like a domino effect. They sell the assets, and they buy back the dollars to pay off that debt.

ZARROLI: These fluctuations in the dollar's value can cause real problems for U.S. exporters, says Dan Meckstroth, chief economist at the Manufacturers Alliance, an industry group.

Dr. DANIEL MECKSTROTH (Chief Economist, Manufacturers Alliance): It creates problems. It's difficult to manage. It's difficult to plan when you get strong swings in the currency based upon fear factors.

ZARROLI: Meckstroth says for much of this year, the dollar was weakening, which was great for U.S. exporters because it made their products cheaper overseas. To the extent that changes in the months to come, he says, it's a big problem. Until now, the strong export market was one of the few bright spots in the U.S. economy. Foreigners have been snatching up U.S. farm equipment, diesel engines, and pharmaceuticals. If the dollar keeps getting stronger, U.S. goods will become more expensive overseas and the export market, too, will begin to dry up. Jim Zarroli, NPR News, New York.

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