Weak Dollar Changes Market Environment

The U.S. dollar began depreciating rapidly again in September after a stable summer. By late October, the dollar had fallen 6% against the Canadian dollar and the euro, 4% against the yen, 3% vs. the Singapore dollar, 2% against the Korean won and slightly vs. currencies in Thailand, Taiwan, the UK, Brazil and India. It remained unchanged in China, Hong Kong and Malaysia, where exchange rates are fixed to the U.S. dollar. Financial markets believe the weakening dollar provides a welcome confirmation that the summer growth slowdown in the United States is over, and that the U.S. balance of payments deficit will resume growing. The exchange-rate forecast expects a further 4-5% depreciation of the dollar through 2005 because of the large and growing trade deficit and the recent meager stock market returns restrained by the sustained high price of oil.

The weaker dollar changes the semiconductor market environment. It will inflate the value of semiconductor shipments converted from local currencies to a common dollar measuring stick. Sales will appear to be as much as 5% stronger than they actually are. Also, the export price competitiveness of products manufactured in the United States will improve, while the reverse occurs in Europe, Japan and Canada. The immediate impact will be small, but there will be a measurable impact on country sourcing decisions by 2006.

China will share in the enhanced price competitiveness of dollar area manufacturers. This will make it more difficult to keep the Chinese economy from overheating, as China attracts more manufacturing activity from Europe, Japan and Korea. Even the gain of a few percent will cause the political pressure on China to appreciate its currency to intensify, especially from Korea and Europe. So the risk that products now sourced in China will rise sharply is much higher for the 2005-06 period. Significant currency re-evaluation is still unlikely, so the alternative is rapidly increasing inflation. Several years ago, the Chinese Consumer Price Index moved from deflation to a 5.4% annual rate with further inflation expected. Already, this inflation has begun to move into wages and will soon appear in product prices.

Source: Federal Reserve Board Forecasts and Weights: Reed Research Group

These currency changes boost the U.S. and Chinese economies at the expense of Europe and the developing world. The product implications are favorable for consumer product designs for the Chinese domestic market, and for IT equipment and consumer PC sales in a stronger U.S. economy. However, the implications are negative for sales of minimum-feature consumer electronics sold in the developing world, especially Latin America, Turkey and Eastern Europe.