VideoFinance 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.
Shorting The Greenback
To avoid such costs, and to meet the requirement under FAS 133 that such instruments be marked to market regularly, the most logical hedge for all but the largest or most highly leveraged companies would be to borrow money in the currency under siege. "Actual [financial] hedging would be very expensive," says University of Michigan economist Nejat Seyhun. Were he a finance executive of a smaller company concerned about a dollar downturn, he "might reduce my liabilities, reduce the foreign-currency debt, and increase my U.S. borrowings," in effect shorting the dollar. To be sure, massive new corporate borrowing in dollar terms could put upward pressure on U.S. interest rates, sending the dollar higher and undermining such a hedging strategy, but Seyhun says that scenario is highly unlikely.
Even some of the largest companies are doing what he recommends. Consider Wal-Mart, arguably the U.S. company most heavily exposed to a run on the dollar. China is the discount retailer's largest source of products, supplying some $20 billion in goods last year, according to analysts. The company plans to increase U.S. borrowings in 2005, says Jay Fitzsimmons, Wal-Mart's treasurer and senior vice president of finance, though he contends it's not for purposes of hedging, since the Chinese currency is linked to the dollar.
In any case, says Fitzsimmons, "we try to do as much as we can naturally." Natural hedges include setting aside cash and borrowing in local currencies such as sterling, yen, and Canadian dollars. But Fitzsimmons says the company will probably borrow about $5.5 billion to $6 billion by year's end, up from about $1 billion so far this year. Its total debt portfolio currently weighs in at around $30 billion, including everything from public bond issues to commercial paper.
Like other companies, Wal-Mart has natural alternatives to hedging with debt, including diversification, thanks to retail operations in 10 different countries. "On one level, our retail operations portfolio contains a mix of emerging markets and more-established markets," notes Fitzsimmons. Two of Wal-Mart's largest markets—Canada and Mexico—recently saw their currencies actually fall against the U.S. dollar. (The company's 37.8 percent interest in a Japanese retail outlet, Seiyu Ltd., is accounted for as an equity investment, and is not consolidated.)
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