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The falling dollar and the Tech sector

Pressure on

We are all aware that the US dollar recently declined to a four year low against the euro, writes Bob McDowall of Bloor Research. Perhaps, it is more accurate to state that the dollar has retreated from its overvaluation of the past four years. More importantly, many so-called experts suggest that the dollar will not recovers its strength for "a long time to come."

So the euro grows stronger; the UK pound sits somewhere in the middle but still moves more in sympathy with the dollar than with the euro, albeit that we are advised that the economies of Euro-land and the UK are converging.

The most apparent effect should be more exports of US technology hardware and software to Europe. It should all be cheaper, more cost justifiable, another contributing factor to a loosening up of pent-up IT budgets and spending. Buy while stocks are cheaper and while they last. This should stimulate innovation and production in the USA.

Life becomes more difficult for European IT product and service suppliers. The costs of their products and services rise. They have to compete in areas of service and quality beyond the cost factors or lower their margins. Of course, US enterprises, which maintain establishments in Europe for service, marketing and distribution purposes, will see some incremental additions to their local cost bases.

If the dollar does not recover its strength for some time, we should see some reforms in the structures of the European labour markets, which are as substantial an impediment to the IT industry as they are to any other sector. Prolonged US dollar competitiveness will lead to further consolidation of the IT industry in Europe through mergers and acquisitions.

The alternative does not really bear contemplation. The challenges of social and labour reforms in Europe are so daunting, that even more of the IT industry moves to cheaper locations for both manufacturing and service support purposes. However, political expediency may encourage some European governments to subsidise and provide greater protection to their local industries.

A weaker dollar will lead to further diminished opportunities for trade liberalisation, as governments, faced with higher national unemployment through a more competitive dollar, will seek to protect national based enterprises.

The irony of all this is that the USA will not suffer from a weak dollar. The US economy is more flexible (than the EU) and is equipped to handle the sharp volatility of its currency. ©

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