International Molding Report: A tale of two currencies: The dollar, the euro, and the impact on U.S. molders

This IMM International Molding Report is prepared for IMM by Agostino von Hassell of The Repton Group, who provides IMM's monthly Molders Economic Index. 

The euro was born on Jan. 1, 1999, and became a true agent of change. Now, even more change will come Jan. 1, 2002 when the euro completely replaces the mark, the lira, the franc, the guilder, and the escudo—European currencies that have been around since the Middle Ages. 

On the surface it may be hard to understand just what an impact this change in currency has on molding shops in the U.S. Isn't this just a change in name? Yet, the often painful advent of the euro has impacted almost every single injection molding plant in the U.S. 

Consider this: In the first 27 months of its life the euro can be held accountable for these key developments: 

• Exports to the U.S. from the euro zone of injection molded products, or products containing considerable quantities of injection molded parts, increased 16.5 percent in 1999, and an additional 11.4 percent in 2000, compared to 1998. 

• Exports of such products from the U.S. to the euro zone declined 7.8 percent in 1999; 14.6 percent in 2000. 

• Injection machines and other processing equipment manufactured in the euro zone have declined in price about 20 percent over that time period, boosting sales of such units in the U.S. by close to 22 percent since 1998. 

• U.S. molders with operations in the euro zone have seen their global bottom lines suffer as the value of profits generated in Europe has declined in U.S. dollar terms. This has affected large and small companies; note how many multinational corporations were forced to lower profit estimates as the value of contributions from European operations declined. 

• In February the U.S. Labor Department reported that import prices for all goods have been declining for almost two years now. 

Why Did This Happen? 
With the advent of the euro in 1999, economists and politicians across the globe predicted the emergence of a new power currency to rival the dollar. Generally, economists and currency traders projected a strong euro, which would gain in value from the initial exchange rate of $1.17 to the euro. In fact, the reverse happened, causing the very concept of the euro to be doubted across Europe. At the end of October and the beginning of November 2000, the single European currency hit a low of $.84 (see Figure 1). 

The reasons are relatively obvious. Economic growth in the euro zone never hit any of the ambitious targets set by the various governments there. Worse, even conservative targets of 2.8 percent GDP growth were not achieved. Europe's economies, which are fraught with structural problems, failed to perform as anticipated. 

At the same time the U.S. economy boomed, creating massive demand for imported goods from around the globe. While politicians in Europe grumble over the low value of the euro, most manufacturers are neutral or even pleased. 

Several German injection molders say that the sharp decline in the euro's value has allowed them to expand export sales in Canada, the U.S., and Mexico. And almost every producer of capital equipment for the injection molding market has seen exports to the U.S. grow significantly. 

Note here that for all of 2000, injection machine imports into the U.S. from the euro zone grew 7.5 percent over 1999. And 1999 export sales grew 19.4 percent over 1998. At the same time the average declared price for molding machines declined in 2000 by 6.7 percent compared to 1999, and by 14.6 percent in 1999 compared to 1998. 

Here are some other examples. In 1998, a mold was shipped from Portugal to the U.S. for use in the manufacture of a home appliance part. This complex mold was sold in 1998 for $144,500. The mold buyer purchased an identical tool in October 2000 for $112,740, a price cut—due entirely to the decline in the value of the euro—of about 15 percent. 

In 1998 a German injection molder shipped molded rearview mirror components to a carmaker in the U.S. The exact same part was sold in 1999 for about 18 percent less than the 1998 price, and in 2000 for 21 percent less than the 1999 price. 

One final example: A molder from Georgia sold about $85,000 worth of injection molded parts for home fire detection and alarm systems to France in 1998. The same quantity was shipped in October 1999 for $93,000. In 2000 the French buyer cancelled the order because the Georgia molder could not cut prices. 

Careful Projections 
Projecting changes in currency values, even over the short term, is highly risky. This is particularly the case with the uncertain U.S. dollar and euro relationship. 

The dollar has maintained its strength in past months and actually strengthened in past weeks. This runs counter to the conventional wisdom that lower interest rates as well as a weakening economy depress the value of a currency such as the dollar. 

Most European and many U.S. banking analysts confidently project that the value of the dollar will decline over 2001 as economic growth slides in the U.S. and increases in Europe. Most projections call for a value of $.98 to the euro by December 2001, up from about $.93 in early March 2001. 

Despite these projections, we doubt this will happen. Rather, we see the euro gaining some minor strength over the course of this year, possibly ending 2001 with a value of $.95 by December. 

Why is this the case? We do not believe that economic growth in the euro zone will hit projected targets. At the same time, U.S. manufacturing will emerge from the current recession far more rapidly than most anticipate. This will again boost U.S. demand for goods from Europe and Asia; and this in turn will strengthen the dollar. 

Additional massive interest rate cuts that would depress dollar values are unlikely. The Federal Reserve may, at the most, cut rates by one additional percentage point. But that's it, and if the economy gains strength and signs of inflation persist, rates might not be cut at all. 

The bottom line for North American molders now is the continued strong import pressure for European parts makers and the availability of low-priced European capital goods such as injection molding machines, molds, and auxiliary equipment. 

Figure 1. Euro vs. U.S. dollar