MUNICH, Germany - There is little relief in sight for European automakers and suppliers whose margins are shrinking because of the strong euro.
"Our current forecast has the euro going to $1.35 by the end of the year," says Global Insight Chief Economist Nariman Behravesh.
The currency used by 12 European countries was trading above $1.26 last week. Although automakers expect periodic currency fluctuations, a 46 percent swing in two years is hard to ignore.
Because of the strengthening euro, Goldman Sachs cut its rating of the European auto sector to "cautious" on Jan. 6.
A weak dollar makes the cost of imported goods higher in the United States, and reduces the value of any U.S.-generated profits when a European company converts them back to euros.
The weak dollar has had a big impact on European companies. For example, it cost Volkswagen AG $1.5 billion in pre-tax profits in the first nine months of 2003.
Bosch says its total sales in 2003 will be the same as 2002 because U.S. growth has been eroded by the unfavorable exchange rate.
European automakers and suppliers traditionally take a long-term view of currency fluctuations. German automakers often use financial hedging strategies to reduce the fiscal impact.
BMW Group, Volkswagen, DaimlerChrysler AG and Porsche AG use such strategies. A hedge means companies purchase what are essentially currency insurance policies that allow them to lock in a rate to sell dollars for euros.
Hedging is a short-term solution because it tends to be expensive. "You can't completely protect against the loss, just make it less," Behravesh says.
A better defense is building a product where it is sold because costs and revenue are in the same currency. "As the industry globalizes, (exchange rates) become less critical," says Philip Gott, director of automotive consulting at Global Insight in Lexington, Mass.
International suppliers such as Robert Bosch, ZF and Visteon can mitigate the impact of currency fluctuations because they produce parts worldwide. But Euro-zone suppliers that make commodity parts such as batteries will suffer, says Christoph Sturmer, a Frankfurt-based analyst for Global Insight.
Behravesh said the White House is happy to see the dollar drop because it will boost U.S. exports. He also doesn't expect the European Central Bank to intervene. With the two major players on the sidelines, Behravesh said the markets will push the euro higher and the dollar lower.