Many may not realize it, but recent times have been good for American manufacturing. A plethora of reasons have made domestic manufacturing a good deal… if CEOs could get past the myopia of "outsourcing is good." Rising fuel costs make supply chain costs more expensive, political turmoil overseas heighten the risk, and a weak dollar has created at least temporary inherent cost advantages.
Some companies have flown in the face of popular perception and have stuck with their domestic factories. The smart ones among them have also taken the time to improve internally to become more competitive. Other companies did flee overseas, and they are now trying to figure out where to go next in order to chase supposed low costs. Some of them are finally waking up to the fallacy of that strategy, often driven by traditional accounting voodoo, and are returning back to the U.S… where they find they are suddenly competing with the companies that stuck it out and improved. As we said before, Too Bad, So Sad. Sorry, sympathy runs shallow.
The cost advantage, or parity, window may be closing. Some recent articles are beginning to discuss the possibility that the dollar’s long slide is over. If that’s the case, the future will require domestic companies to be even more productive as the currency exchange begins to shift.
The dollar’s bounce in recent weeks has investors wondering whether this is the beginning of the end of its extended slide.
It’s about time, like it or not.
Such a turning point would be one of only a handful over the past 30 years. Since the late 1970s, the dollar has experienced long, deep, multiyear trends, veering from superstrong to feeble and back. These currency cycles have tended to last from five to seven years in each direction.
By that standard, the dollar’s decline, now more than six years old, is looking long in the tooth. The dollar touched its recent peak versus the euro in late 2001, and against a broader group of currencies in early 2002.
Yes, long cycles. So if this is the turning point, what does the future hold?
"The biggest question I get is, ‘Has the dollar embarked on a seven-year uptrend?’" said Parker King, head of currency investing at Putnam Investments. Some of his clients have started to prepare for that eventuality, he said, by changing their level of exposure to the dollar’s movement.
The recent runup of the dollar has been rather extraordinary, but it follows a historic pattern.
The dollar’s latest gains – it is up 8% versus the euro and 5% against the Japanese yen since [just] mid-July.
The record shows that major changes in the dollar’s direction take time to unfold and rarely are smooth. In each case, the dollar reached a point of extreme weakness or strength before heading in the other direction. The current slide seems to follow that pattern. Experts say it is about 30% too cheap based on economic fundamentals.
It’s a cycle and has happened before, so smart executives have presumably been planning for this. Have you? Isnt’ that what you’re paid to do?