The Declining Dollar

Indeed, according to economic theory, currency devaluation is the natural response to outsized budget and trade deficits, says John Graham, a professor of finance at Duke University's Fuqua School of Business and director of the Duke/CFO Global Business Outlook Survey. "If as a country you don't save, and you spend, spend, spend, ultimately your currency will devalue," he says. Given the lack of savings in the United States and the growth in the Chinese and Indian economies, "it's possible that the United States is in the beginning of a decline," says Graham. "It could be that we've lost our way a little bit."

Still, most CFOs are hesitant to count the dollar out. "There are some radical imbalances in the U.S. economy that are pushing for this kind of depreciation," says Edelstein. "But the economic dynamics are such that the situation will correct itself." The weaker dollar will attract capital to the United States and drive exports, he says. David Elkins, North American finance chief at AstraZeneca International, the British pharmaceutical company, also anticipates an increase in cross-border merger activity. "U.S. assets are becoming cheaper for foreign investors. We will start to see more foreign investment in the U.S. market," he says (see "Attention, Shoppers!" at the end of this article). In one example, Dow itself just announced a U.S.-based joint venture with Petrochemical Industries Co. of Kuwait to manufacture and market plastics.

In fact, another reason the dollar's fall may not be such a bad thing is that the very processes that restore economic equilibrium — like foreign investment and increasing exports — are currently buoying the U.S. economy. "If the dollar had stayed steady in our current economy, I think we'd be in a recession," says Global BPO Services's Kane. "As much as the Federal Reserve and governmental agencies knock the dollar's decline, I think they're secretly applauding it."

While there are elements to the dollar's weakness that indicate a longer-term shift in its value relative to other global monies, many doubt that the euro — much touted of late — will necessarily become the world's leading currency. "If you look at the prospects in Europe versus the U.S. from an economic-growth standpoint, I would put my money on the U.S.," says Hayes. Graham agrees: "Europe faces high tax rates, huge social programs, and promises to future retirees. I don't think the U.S. will be worse off than Europe 20 years from now. But we might well be worse off relative to the Asian economies."

For now, the change in the dollar's value relative to other currencies is forcing many businesses to become truly global. "It's becoming more and more the standard for corporations to match the location of their expenses to the location of their revenue flow," says Kane. United Technologies offers one example of how such a strategy provides an effective buffer against foreign-exchange fluctuations and serves as the ultimate hedge. But CFOs stress that while the dollar's fall may be accelerating such operational changes, foreign-exchange concerns are not the only reason to make a move.

"The business logic is the primary driver for any new initiative, but we have been acutely aware of the impact of currency changes, and we've been trying to bring that into our decision process," says Brandgaard. Given the general uncertainty about where the dollar is headed, that strategy seems wise.

Kate O'Sullivan is a senior writer at CFO. Additional reporting was provided by CFO Europe editor-in-chief Janet Kersnar, CFO Asia managing editor Don Durfee, and CFO Asia editor-in-chief Tom Leander.

Attention, Shoppers!

Discount fashions aren't the only lure to foreign shoppers seeking bargains in the United States. "The weaker dollar is going to attract a lot of capital as foreign buyers start to see U.S. assets as undervalued," says Pablo Edelstein, CFO of Dow Latin America.

Indeed, foreign direct investment in the United States was up by 11 percent in 2007. In one recent example, last December, the German airline Deutsche Lufthansa paid $300 million to buy a 19 percent stake in JetBlue Airways Corp., with Lufthansa executives citing the weakness of the dollar as one reason for the deal.

Foreign investors have targeted U.S. financial firms in particular, with Canada's TD Banknorth Inc. purchasing Commerce Bancorp for $8.5 billion; China Investment Corp., an investment arm of the Chinese government, sinking $5 billion into Morgan Stanley; the Abu Dhabi Investment Authority investing $7.5 billion in Citigroup; and China's Citic Securities taking a $1 billion stake in Bear Stearns. (The U.S. investment bank put $1 billion into Citic, too.) And in one of last year's final deals, Singapore's Temasek Holdings bought a 9.5 percent share of Merrill Lynch.

The subprime-mortgage meltdown has made the financial sector a particular hot spot, but other areas will likely see more foreign interest if the dollar stays soft. In late 2007, international buyers purchased U.S. companies in the health-care and consumer-products sectors as well. — K.O'S.

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