Weaker dollar makes European trips, cars higher

WASHINGTON -- Americans planning for European vacations should be braced to pay more. Ditto for people eyeing European cars. The reason: The dollar's value has hit a four-year low against the euro.

The slide against the euro, and to a lesser extent against other foreign currencies, is likely to continue, analysts say. They believe the Bush administration has made a shift in its attitude toward the greenback.

Including a tumble Monday, triggered by comments Treasury Secretary John Snow made on a Sunday interview program, the dollar is now down by close to 30 percent against the euro, the common currency of 12 European countries. The dollar has declined by a smaller, but still significant, 15 percent against a trade-weighted market basket of currencies.

That means higher prices not only for German cars, French wine and Italian shoes but also Canadian beer, fruit from Mexico and cell phones from South Korea.

Continuing fall

Analysts believe the dollar's fall, from admittedly high-flying levels, will continue, given a variety of forces at work. The dollar fell against the yen in late trading in New York Wednesday and was little changed against the euro. It cost $1.1511 to buy one euro, close to Monday's four-year low of $1.16, set in European trading.

Snow's comments Sunday have attracted attention in the rarefied world of currency markets, where more than $1 trillion changes hands daily. The secretary said a less valuable dollar should help boost American exports.

While that is basic economic theory, as Snow said later, currency traders seized on the comment as further support for their growing belief that the administration is happy to see the dollar decline further to give a lift to America's struggling economy.

With the dollar tumbling Monday, Snow's aides and the White House rushed to insist that there had been no change in the administration's support for a strong dollar. But markets were not convinced.

Given a chance to clarify his position at a congressional hearing Tuesday, Snow said the administration still believed in a strong-dollar policy.

But he also said, "The important thing, I think, is that the currency's valuation reflect real demand and supply forces, and that it not be held, through intervention, to a level that is above its natural market rate or below its natural market rate."

That opinion, held by many economists, is not one that Treasury secretaries are supposed to express because it signals to markets a reluctance to use the major tool of currency intervention -- the direct buying and selling of currencies by governments -- to influence the dollar's value.

"Secretary Snow has been given plenty of chances to take his foot out of his mouth and he keeps jamming it in deeper," said David Wyss, chief economist at Standard & Poor's in New York. "He is right on the economic fundamentals, but as Treasury secretary you are not supposed to say things like that."

While a falling dollar will mean higher prices on imported goods and on domestic goods that compete with imports, Snow's words have been music to the ears of American manufacturers, who have suffered 33 straight months of employment declines with 2.2 million manufacturing jobs wiped out.

The dollar's big rise from 1997 through the middle of last year is the chief culprit, manufacturers and farmers believe, in the country's soaring trade deficit because it priced U.S. products out of foreign markets while making imports cheaper for American consumers.

Frank Vargo, head of international affairs at the National Association of Manufacturers, said while he believes the dollar needs to fall by another 10 percent, the correction so far should translate into a $100 billion improvement in the U.S. trade deficit, which hit a record $435 billion last year.

"There is no question this is going to help manufacturing," Vargo said. "And it couldn't be coming at a better time. This is a great time for the adjustment."

Other analysts agree. Normally, a falling dollar and rising import prices would spur concerns about inflation. But last week, the Federal Reserve said it was now more concerned about the remote chance of deflation -- falling prices -- than inflation.

With the U.S. economy weak and interest rates and inflation low, the country can absorb the expected small rise in inflation from the falling dollar, most analysts believe.

And the other worry about a falling dollar -- that the decline could become disorderly and prompt foreigners into panic selling of U.S. stocks and bonds -- is viewed as a remote risk, given that the U.S. economy is still outperforming the rest of the world.

"For the United States right now, a declining dollar is a win-win situation," said Wells Fargo chief economist Sung Won Sohn.