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The East: Strong Dollar Could Be Blessing

Prague, 11 August 1997 (RFE/RL) -- The recent rise of the U.S. dollar -- which has pushed down the value of currencies in most of Europe -- is a godsend to East European countries that are trying to boost their exports to North America and attract new U.S. investment.

David Littmann, senior economist at Comerica, one of the largest American banks, is enormously enthusiastic about the potential for East European countries to cash in on the recent fall in the value of their own currencies caused by the dramatic rise of the dollar.

"It is one of the most positive developments they have seen since the fall of the Iron Curtain," Littmann says.

As the dollar has strengthened, currencies like the Polish zloty, the Czech crown and the Hungarian forint have fallen in value. This means each dollar buys more goods and services in each of these countries than it did, for example, a year ago.

"The products that (Eastern European countries) produce become more competitive and as the dollar strengthens, it's easier for North Americans to buy their products and services," says Littmann.

Eastern Europe already has an advantage in world economic competition in having a low-cost well-educated labor force. And as the dollar strengthens, wage costs in Eastern Europe sink in dollar terms. This makes it cheaper for companies that do their accounts in dollars to hire East European workers and is an incentive to invest in the region.

Littmann says that companies such as accounting firms and computer software manufacturers may shift operations to Eastern Europe -- as they have already done to India -- to take advantage of the technologically-savvy, well-educated work force at lower costs than in the U.S. or Western Europe.

For countries like Russia and some of the oil-rich Central Asian countries, which sell their oil and natural gas for dollars, their export income is now worth vastly more when converted into their own domestic currencies.

This is the broad picture. But a closer examination proves that it's hard to make generalizations.

Boris Gomez, an economic analyst at ING Barings (bank) in Prague, says that it no longer makes sense to look at all the Eastern as one region. Each country there must be judged on its own merits, and some of them are still so closed to the world economy or have such deep problems of their own that they are little affected by global movements.

Belarus, for example, is an economy that is practically closed to Western trade and is hostile to foreign investment. The value of the local currency, the Belarusian ruble, is set by government decree -- not fluctuations on world currency markets. Extremely strict police control and large fines have practically wiped out the black market, where the relative values of the ruble and dollar were set by market forces.

Lithuania is another big exception to the general picture. Its currency is pegged to the dollar, so in fact its exports to the rest of Europe suffer because, since the beginning of the year, they have become 20 percent more expensive for customers buying in Deutschemarks. But most East European countries have seen their own currencies sink -- in many cases because domestic considerations compounded the world-wide effect of the rising dollar.

Poland's economy, for example, is highly regarded and has one of Europe's strongest growth rates. But the zloty has been sinking recently, pulled down by worries over the outcome of September's parliamentary elections.

In the Czech Republic, the government freed the crown to float freely at the end of May -- and the result has been a 10 percent devaluation of the crown brought on by expectations of slower growth, higher inflation and continued political infighting.

The fall of the crown means "there will be a positive effect on (the Czech Republic's) trade," says Martin Kupka, chief economic researcher at Patria Finance (an economics analysis firm) in Prague. With imports priced in dollar more expensive, Czech businesses and consumers will cut back on imports, at the same time that Czech companies will be able to sell more of their products abroad for dollars.

One drawback of the high dollar, though, is that the Czech Republic, like many other countries, imports natural gas and oil for dollars. So their price to Czech consumers -- in crowns -- will go up, which could fuel inflation. However, economists have so far been impressed that inflation has stayed under control in June and July.

(Of course, the rise of the dollar and the fall of local currencies also means increased costs for those East European consumers who want to travel abroad, or want to buy Western goods imported for dollars.)

Littmann, the U.S. economist, says that countries that peg their currencies to the Deutschemark have a double blessing. First, by tying themselves to the currency of a country that practices economic probability, they are forced to adopt for themselves monetary and fiscal discipline they might not have on their own. And second, when their currencies fall along with the DM, they have the chance to boost their export earnings in dollars.

However, one factor may temper the windfall to East European countries whose currencies are falling against the dollar but not against the Deutsche mark. To the extent that their trade is with Germany or the European Union and priced in Deutsche mark, they will see no increase in export earnings. They will realize this bonanza only in exports for dollars.

Bulgaria, struggling to emerge from near-economic collapse, has recently tied its currency (the lev) to the Deutsche mark. But the economy is too feeble right now to take advantage of lev's resulting weakness against the dollar.

Our economic correspondent in Washington says that probably the best thing about pegging the lev to the Deutsche mark is that it keeps Bulgaria out of the skirmish with rising and falling dollars. Our correspondent says: "Weak currencies are particularly vulnerable to problems when there is a major realignment going on." With the lev fully pegged to the Deutsche mark, it avoids being caught in the "scissors" of rising dollar and falling Deutsche mark.

Perhaps the biggest winner of all the former Communist countries is Hungary, where the rise of the dollar has given a tremendous boost to the stock market by making Hungarian assets cheaper to buy for holders of dollars. "The Budapest stock market continues to climb up and up. Practically every day it hits new highs," says economist Gomez in Prague.

And for the Budapest stock market -- and all East European producers that are exporting for dollars -- the prospects are bright. "The dollar remains strong," says Eric Fishwick, an analyst from Nikko bank in London.

Winfried Muenster, economic commentator for the Sueddeutsche Zeitung agrees.

"The dollar is far from overvalued," he says. "That means it will continue to climb."

(This is the second part of a two-part series on the effect of the dollar's rise. See World: Dollar Shows Sudden Strength)