Dealing with the dollar: the new dynamic of the exchange rate is leading to challenges in many sectors of the local economy, and there are indications that the going may get tougher.

Is the fall of the U.S. dollar good or bad for L.A.'s economy? In theory, it should be a little bit of both. After all, a weak dollar makes American-made goods cheaper overseas, thereby providing a boost to the manufacturing sector.

On the other hand, imported goods and foreign travel are more expensive, and with shoppers still looking for bargains, businesses get squeezed.

In truth, the dollar's fall is a bit like unemployment. The numbers have little meaning until they hit--and then the impact can be overwhelming.

Ask the legions of workers in the entertainment industry. With the U.S. dollar sagging against its Canadian counterpart, runaway production has suddenly come to a halt. Shooting days in Los Angeles have hit records, bringing lots of people home with fat paychecks.

Since the beginning of 2002, the dollar has lost roughly 20 percent of its value against a broad basket of currencies--and nearly 50 percent of its value against the euro.

Despite some predictable effects, the dollar's fall hasn't gone quite according to form. The expected manufacturing boost is lessened because so many American goods are made in China and other points overseas.

Domestic manufacturers, in fact, complain that their costs have become so high here they still aren't competitive with other countries.

Then there's the issue of China's currency, which is kept artificially low by its peg to the U.S. dollar. China has resisted freeing the yuan thus far, although lately it's hinted that it might turn to a basket of currencies instead.

To date, the dollar peg has meant that the benefits of a falling greenback haven't been felt in the overall U.S. trade relationship with China. The rapidly developing country continues to flood the U.S. with inexpensive goods, feeding a massive trade imbalance that. in turn, is sending the dollar even lower.

(At the World Economic Forum that was to be held in Davos, Switzerland last weekend, the weak dollar and soaring U.S. trade and budget deficits were expected to be the main topics of discussion--and could provide some hint toward how the dollar-yuan question will be resolved.)

In Los Angeles, apparel workers, importers and manufacturers of all stripes in Los Angeles have been hardest hit by China's manufacturing dominance.

Many apparel manufacturers fear that a new surge of cheap imports from China will flood the region due to the expiration of trade quotas on Jan. 1.

But Los Angeles has also benefited from the explosion in cheap Chinese imports. The ports of Los Angeles and Long Beach are doing record volume, and the construction of warehouse and distribution facilities in the Inland Empire has extended the regional economy--in terms of housing, land prices, jobs--farther east.

There are also benefits for U.S.-based multinational corporations, which have reported strong earnings in the past year propelled by the declining dollar. An estimated one-third of all companies in the Standard & Poor's 500 Index got a one-time earnings boost from sales in overseas markets in 2004, according to Thomson Financial.

"Not only are you selling cheaper goods overseas, you're defending yourself from European companies expanding into the U.S. market," said Jim Griffin, vice president and co-foreign exchange manager at Union Bank of California.

On the other hand, multinationals can be so complex that a currency fluctuation that benefits them in one area can harm them in another.

That's what happened to Ford Motor Co., which is having trouble expanding its U.K.-based luxury car division in the U.S. because of the weak dollar. Last week, a Ford executive warned that the U.S. auto industry was at risk in Western Europe because of currency issues and competition from China and India.

General Motors Corp. issued a warning last month on its Swedish subsidiary Saab, which got hurt by the strength of the Swedish krona.

Despite the dollar's fall, Americans still spend roughly $3 importing goods and services to every $2 of U.S. goods and services sold abroad

The U.S. trade deficit, the measure by which imports exceed exports, widened to $60.3 billion in November, and is now 6 percent of gross domestic product.

Many experts say that U.S. appetites are still the biggest problem.

"The dollar is in big trouble and it's not going to change the inherent structural problems in the U.S., which is that we're spending too much," said Axel Merk, president of Merk Investments, an investment advisor in San Francisco. "The one thing that keeps the dollar from plummeting is that it's in everybody's interest to keep it propped up."

One big concern is that foreign investors, fearing a rapid plunge in the dollar, will lose their appetite for U.S. assets. Those investors have provided much of the money the U.S. government has borrowed to cover its $413 billion budget deficit for the fiscal year ended Sept. 30.

Fueling that concern are still-low interest rates. While the Federal Reserve raised short-term rates last week a quarter of a point, to 2.5 percent, the levels remain below historical averages, leaving foreign investors less interested in U.S. paper. Whether the rise in rates, the sixth since last June, will stimulate more interest in the dollar remains a debatable point among investors.

The issue extends to the U.S. stock and real estate markets, where there has been concern over a resistance by foreign investors. Without any strategy for reversing the dollar's decline, the Fed's rate-hiking moves notwithstanding, there are signs that this money flow could be ebbing.

In the property sector, many foreign investors that poured money into U.S. real estate investment trusts the last few years are pulling back, although the Japanese are testing the waters after a decade-long hiatus.

"There are a lot of people who have different views on the subject of the dollar and the real question is whether the markets lose confidence in our policies," said Edwin Truman, a senior fellow at the Institute for International Economics in Washington and a former Assistant Secretary of the U.S. Treasury. "We're not there yet."

Here are some examples of how the falling dollar has affected a variety of businesses in Los Angeles:

The Exporters

Los Angeles exporters would like to be able take advantage of a weak dollar. Alter all, U.S. goods should be cheaper for international buyers paying with other currencies.

But it's not been so easy to exploit the opportunity.

Seth M. Wilen, president of food and beverage exporter American Trading International, said he has seen an increase in daily inquiries from overseas customers looking to buy U.S. products for the first time. Revenues grew 20 percent in 2004, which Wilen only partially attributes to the currency valuation. New free-trade agreements with Morocco, Jordan, Chile and Singapore have also helped, he said.

Yet other factors, such as rising fuel and shipping costs and competition from subsidized industries, have limited the benefits.

"With all of the price gouging going on in logistics and transportation, it's hard to say that the true savings of the weakening dollar are making their way to exporters," Wilen said.

American Trading exports everything from commodity chicken leg quarters to high-end cappuccino mixes to hot sauce. Wilen likes to talk about the international thirst for American products and the American image, but it all comes down to price.

A customer in Dubai, for example, was looking to switch to distributing U.S. dairy products. "In the end, we still couldn't compete in dairy products for the Middle East because European dairy products get much higher government subsidies." Wilen said.

Tedd Koh, president of Amtech Co., saw his small medical equipment export business grow 10 percent last year due in large part to the weak dollar. "We've seen an amazing increase in sales volume because most of our competitor companies are in the EU," Koh said. Amtech ships rehabilitation products and diagnostic devices to customers in Korea, Japan, Hong Kong and Taiwan.

"The euro is really higher than most other countries' currencies, and the pound is also quite strong. With the U.S. dollar really low, it really helps me," Koh said. Amtech did $1 million in sales for 2004, and Koh projects $1.2 million for 2005.

Most of Amtech's customers pay for shipping and freight costs, but the increases still concern Koh. For the moment, Koh's products are cheaper than his European competitors', even when shipping costs are factored in.

But his customers have been choosing ocean freight over air, he said, and the jams at L.A. ports have Koh wondering how much longer his customers will be able to wait. "'The delays are not good for customers," he said.

--Hilary Potkewitz

The Importers

Philip Hall is trying to tread water as the U.S. dollar threatens to drag down his fish import business.

"Every time the dollar goes down, our costs go up because their prices stay the same," said Hall, president and owner of New Zealand Seafoods Inc. "It's a double-whammy because then you've got to pay shipping costs on top of it."

Hall imports orange roughy from New Zealand and Australia, blue nosed sea bass and live shellfish from New Zealand, and tuna from Tahiti, Fiji or the Cook Islands.

Based in Vernon for more than 20 years, New Zealand Seafoods competes with other buyers for the South Pacific catch--and with the value of the U.S. dollar having fallen by 50 percent against the New Zealand dollar over the past two years, he's had to pay up or lose out.

In those two years, the price for New Zealand sea bass has risen to $2.75 per pound from $2.40. Some suppliers quote prices in the buyer's currency, which lessens the impact of fluctuating exchange rams, but others keep their prices in New Zealand or Australian dollars.

"New Zealand sells a lot of fish to Australia," Hall said, "and because their dollar hasn't depreciated like the U.S. dollar has, we've had to match the equivalent of what the Australians are paying."

Freight costs, meanwhile, have surged to about $1 per pound for orange roughy from 60 cents two years ago. For shellfish, freight costs account for nearly 70 percent of Hall's outlay, compared with 25 percent two years ago.

Passing the costs onto the customer is not an option because there are plenty of less expensive fish to buy. "Right now we're extremely unprofitable, but like everyone else we're hanging in there," Hall said.

To combat runaway costs, he has started importing fish from Greece and Tunisia because of a more favorable exchange rate. Hall is also wing to source from South American countries, where shipping distances are shorter and fishermen are willing to trade in U.S. dollars. And he's cut back on advertising, trade shows and travel, and is limiting staff and overtime pay.

Larger seafood companies are also feeling the squeeze.

While most international seafood trade is conducted in U.S. dollars, European and Japanese companies buy in dollars and sell their inventories in their own currency, taking advantage of a stronger yen or euro, said Rick Martin, executive director of Red Chamber Co. The Vernon-based seafood company is one of the largest seafood suppliers in the U.S., with about $1.2 billion in revenues last year, and it does business with more than 40 countries.

"It's like giving a competitive freebee to the countries you're competing against," Martin said.

Cost variances are more aggravated with some species of fish than others. Shrimp, salmon and tilapia are widely fanned and have high production levels, so Martin can rely on volume to make up for price fluctuations for other species.

New Zealand Seafoods, and small importers like it, are more vulnerable.

While sourcing fish from Tunisia and Greece helped ease costs for a while, some suppliers have raised prices six times over the last six months as the euro gained strength.

Hall has experimented with currency hedging in an effort to limit his exposure. He uses an online foreign exchange service, and although he checks prices daily, he said he wouldn't describe it as a strategy. "We are utilizing more of those tools now, but if I had a crystal ball, I guess I should have done it a couple of years ago."

Hall is even looking at the possibility of exporting to some of the countries he buys from. That would be quite a departure from the 23-year history of company, but he added: "We're trying to do things to keep the business going."

--Hilary Potkewitz

The Retailers

CUSTOMERS who shop at high-end jewelry and gift retailer Gearys aren't prone to scrutinizing price tags--and that's a good thing, given that the declining dollar has caused prices at its stores to rise in the face of increased costs from overseas vendors.

It's really been a double-edged sword for the venerable merchant, which has a 15,000-square-foot store on Beverly Drive in Beverly Hills and a 1,500-square-foot store on Rodeo Drive.

"In one way it's helped our business on Rodeo because so many European tourists are here because it's much more advantageous for them to travel and shop here," said President and Chief Executive Tom Blumenthal. "On the other hand it has hurt us, because so many of our products are brought from Europe and we're getting price increases from all our European vendors that are much higher than before."

Gearys, which sells jewelry, flatware, stemware, dinnerware and picture frames, now pays 7 percent to 12 percent more for merchandise from Europe than this time last year, and those costs are being passed on to customers. Seventy-five percent of its merchandise comes from Europe, while the remainder comes from the U.S. and Asia.

The cost rises, however, have been met by double-digit increases in revenues.

The 75-year-old retailer is trying to negotiate harder with European vendors to keep costs down. "They definitely need the business and they don't want to lose the American dollar," said Blumenthal. "Many companies that work with us are willing to sacrifice a little of their margin to compensate for the weak dollar."

Outside of negotiating and raising prices, there's little Gearys can do, said Blumenthal, noting that the retailer is continuing to advertise in local and tourist publications, including the Japanese Tourist Guide. Front Desk, the Los Angeles Times and Angeleno and Los Angeles magazines.

"We've been down this road before," said Blumenthal, referring to exchange rate issues it has faced with the franc and the pound. "It's nothing new. Everything goes in waves."

--Rebecca Flass

The Hoteliers

CATERING to Japanese travelers has its advantages, but it doesn't solve all a hotel operator's woes.

The New Otani Hotel & Garden in downtown Los Angeles is finding that even though occupancy rates are up, there are challenges ahead. "It's a mixed bag," said Ron Kipling, director of rooms for the hotel.

International visitors comprise about 50 percent of the hotel's clientele, with many of those coming from Japan. As the yen's purchasing power has risen by 25 percent against the dollar, it has made travel to Southern California a lot more appealing for Japanese travelers.

January occupancy at the 434-room New Otani was up between 8 percent and 10 percent over the year earlier, Kipling said, pushing levels to close to 60 percent. In the closing months of 2004, the average daily room rate rose 3 percent to 4 percent compared with the year-ago period, said Kipling.

The recent occupancy rate of most downtown hotels hover around 60 percent to 65 percent, according to PKF Consulting.

But gauging the effect of the rising buying power of foreign currencies is hard to pinpoint. The rebound at the New Otani, and other hotels, came as the industry was starting to shake off the effects of the 2001 terrorist attacks, followed by the SARS outbreak and travel concerns at the beginning of the war in Iraq.

Still, the undeniable strength of other currencies has not resulted in free-spending ways by overseas tourists.

"If you go back a decade ago to where international travelers spent a lot of money, bought high-end products, shopped on Rodeo Drive and were very name-conscious, we haven't seen a return to those days," Kipling said. "The travelers we see are still somewhat budget-conscious in how they spend money."

While larger hotel chains may be able to spend enough on overseas advertising to capture an even bigger share of international visitors, the New Otani is unable to do that, although it continues to market its L.A. and Hawaii hotels to the Japanese and European markets, said Kipling.

And while it's clear that the U.S. is poised to see an increase in international visitors because it has become cheaper to travel here, that doesn't mean all destinations and hotels will reap the benefits.

"There's a lot of competition for travel dollars from Las Vegas, Seattle, San Francisco and San Diego, as well as around the country," Kipling said. "We can't be complacent simply because suddenly we have a (weak) national currency. We have to market the city aggressively and work to make improvements and offer amenities we know we need to, to be attractive to foreign visitors."

--Rebecca Flass

The Real Estate Investors

TOM Bohlinger is finding that low as the dollar might be these days, it's not generating increased interest among foreign purchases of U.S. real estate. In fact, many investors are sitting on the sidelines and may actually reduce their holdings this year.

The concern is that as the dollar has fallen, real estate prices have risen. "Even though the dollar has gotten weaker, the returns have reduced drastically," said Bohlinger, a senior vice president at CB Richard Ellis Inc. who has represented several foreign buyers.

Instead of using the increased buying power of their currencies to make acquisitions, European, Asian and Australian firms have become concerned with the falling value of the dollar.

Buyers from those countries aren't likely to jump back into the market in Los Angeles, or in other U.S. cities, until the dollar begins to stabilize, according the Association of Foreign Investors in Real Estate.

"If they think the dollar is only going to fall more, they won't want to buy because the value of their investment would decrease," said Jim Fetgatter, the association's chief executive. "They are going to wait until they believe the value of the dollar is going to get stronger."

Some of the resistance is surprisingly basic. There is, for instance, the nine-hour time difference with Europe that even in an Internet age serves as a hindrance in cutting deals. "You can't do business during the day," said Fetgatter.

Recently, some firms have begun to open offices in California and Arizona, to make it easier for acquisitions. Deutsche Bank based its RREEF Funds LLC--an active player in the Southern California market--in San Francisco for that reason.

Many of those new offices might be looking for opportunities in the Los Angeles region. "There is some evidence of Los Angeles still being on the rise (as a preferred site for overseas money)," Fetgatter said. "Anecdotally, you just hear a whole bunch more people talking about it."

While spending on real estate globally and in the United States is slated to increase, investors told the association in a recent survey that they would reduce their U.S. acquisitions to 55 percent of their available funds this year, compared with 71 percent in 2004.

Nearly 60 percent of the survey respondents said it has become "very difficult" to find attractive real estate opportunities, compared with 38 percent falling into that category in 2004.

The results track closely with what Bohlinger said be is hearing from overseas investors.

"Some foreign funds think there are better returns in other countries," he said. "Even though real estate may look cheap with the dollar's decline, the returns are still pretty low."

While German investment groups have been the most active foreign buyers, there also has been renewed interest from Japan. Last week, Fetgatter said he was meeting with a Japanese firm on a fact-finding tour of the United States.

Many Japanese companies paid high prices for trophy U.S. properties in New York and Los Angeles before values plunged in the early 1990s. Some of the firms were forced to sell, sometimes at 50 percent of their purchase price. Los Angeles attracts the third highest amount of foreign capital, behind Washington and New York.

"There's anecdotal evidence the Japanese are interested in the U.S. again, though there's no concrete activity yet," Fetgatter said. "But they are thinking of investing in real estate and they are thinking about the U.S. This time around, I think they are trying to be very cautious."

--Andy Fixmer

The Manufacturers

THE fall of the U.S. dollar has made Small World Kids Inc. act like, well, a kid in a candy store.

The 40-year-old business manufactures 750 toys under the brands IQ Baby, IQ Preschool, Ryan's Room, Puzzibilities and Neurosmith. And while sales to U.S. retailers account for more than 75 percent of Small World's business, trade with Europe and South America is providing a nice boost, thanks to the dollar's fall.

With its goods, all manufactured in China, becoming less expensive for European buyers, sales volume is up. Debra Fine, Small World's chief executive, said buying the toys at a relative discount gives overseas retailers more options as they market to consumers.

Retailers in Europe have used the spread to their benefit. They can offer the product at the suggested retail price, which increases profit margins as the strong euro allows them to buy more goods for the same price. Or they can use the spread to discount the retail price, drawing in customers while not cutting their margins as significantly as they might have when the euro bought less.

Small World posted revenues of $25.9 million in 2002 and 2003 and Fine said it was on a "strong growth path" for 2004.

The company is also benefiting from a decision made a decade ago to shift manufacturing operations from England and Germany to China.

"We used to manufacture in Europe," said Fine, "but we decided to move to China because we would lose money when the dollar was weak. It's very positive for (Europeans) because it's like they are getting a 30 percent discount."

John Nelson, Small World's chief operating officer, stresses that the company is not relying on currency fluctuations to be the engine of revenue growth. "We're in the (business) of designing and manufacturing toys," be said. "The last thing we want to do is manage foreign currency."

The company is currently negotiating with 10 major distributors in China, Europe and South America to expand its sales network. Having bought out Long Beach-based Neurosmith LLC last year, it's also in an acquisition mode, though the weak dollar means it will stay on this side of the ocean in those efforts.

"For us to go and acquire a company in Europe, it's probably not a good time," said Fine. "We would probably overpay."

--David Greenberg