BBC reports that Brazilian model Gisele Bundchen has asked Proctor and Gamble to pay her in Euros (Gisele's spokeswoman denies the arrangement). Frantic as ever, on Nov. 7 CNBC’s Jim Cramer blamed news of Gisele’s request for fueling a market sell-off.
Lost in the jokes about supermodels becoming arbiters of international finance is this reality – Gisele’s request makes no sense. The reason is that eleven trillion dollar a day entity known as the foreign exchange market. On the forex one can instantly translate dollars into euros for miniscule transaction fees. Thus, if Gisele is genuinely worried that further declines in the dollar will erode her purchasing power, she could just take her lump-sum payment and immediately convert it into euros.
Alan Greenspan made this point a few months ago in his 60 Minutes interview with Leslie Stahl. In one of many futile attempts to divine Greenspan’s views about the market, Stahl mentioned Greenspan’s multi-million dollar book advance and asked, if he had the choice, what currency Greenspan would prefer to be paid in. Greenspan made the above point that the possibility of currency conversion made the currency of payment inconsequential; the choice with real economic consequences, he noted, is in what currency-denomination one holds one’s long-term assets (e.g. U.S. stocks versus European stocks). Unsurprisingly, Greenspan recommended diversifying one’s assets among several currencies to hedge against depreciation risk.
By the way, I’m assuming that Gisele gets a lump-sum payment akin to a book advance. If her P&G contract is pro-rated over several years, then her request to be paid in euros at least has some logical grounding. As a practical matter, however, Gisele still risks shifting into euros at the wrong time. Over the past year the dollar has already lost more than 70 percent of its value against the euro (today it takes $1.46 to buy a euro; a year ago it took 84 cents). Over, say, the next year, can the dollar really fall much farther? Goldman’s Jim O’Neill doesn’t think so, and he is not a prognosticator to be taken lightly. Rather than dabbling in currency speculation, the safest way for Gisele to protect her income is simply to have P&G index her salary to America’s C.P.I. or some other measure of price inflation.
On more substantive currency matters, yesterday's NYT informs us that the dollar hasn’t fallen nearly as much against the Yen (or other Asian currencies) as it has against the Euro. I, for one, hadn’t realized this – and it’s a useful reminder that currency pairs do not all move in tandem.
Also, Paul Krugman has a fine blog post explaining why he is skeptical of prophecies that the dollar’s decline will seriously reignite U.S. inflation (he cites a combination of relatively low pass through from exchange rates to U.S. import prices, plus imports only totaling about 15 percent of U.S. GDP). Always refreshing to see Krugman make the case for stability rather than crisis.
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Gisele's alleged aversion to the U.S. dollar aside, I think the real issue comes from renowned economist and Iranian president Mahmoud Ahmadinejad claiming the U.S. dollar to be worthless at the OPEC conference this past week. In a surprise statement, Venezuelan president Hugo Chavez championed Ahmadinejad's comment, claiming that "the fall of the U.S. dollar is the fall of the U.S. empire."
With such prestigious experts making such dismal predictions, how is the U.S. dollar ever to recover?
You're forgetting the fact that Gisele is a supermodel, so actually making the immediate conversion to Euros herself is something with which she cannot be bothered. That being said, I know that all of my choices in the foreign exchange follow those of Gisele--she is such a trend setter.
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