Economic tables turn as euro falls against dollar

Only a few months ago, Americans were fretting about a weak dollar, adoring the euro and looking for ways to insulate themselves from the greenback's slide.

They were buying foreign mutual funds to take advantage of stronger currencies. They were adding oil and other commodities to their portfolios because natural resources tend to perform well when the dollar is weak.

Shoppers were skipping French wine, Italian shoes and European vacations as the falling dollar increased the cost.

Then along came the European debt crisis, and all is turned upside down. Now the euro is plunging. Although you needed $1.60 for a euro in early 2008, on Tuesday it fell under $1.22 during trading as it dropped to a four-year low. Some economists predicted parity — $1 per euro — by late this year or in 2011.

The topsy-turvy ride of the dollar and euro shows how quickly conditions can change — upsetting common assumptions. But with that in mind, here are some effects of the weakening euro:

For the consumer:

A trip to the gas station will probably become easier to stomach, because oil — priced in dollars — becomes less expensive in the U.S. when the dollar strengthens. In addition, with the European economy slowing, demand for oil is likely to fall, also lowering the price.

Food is also expected to be cheaper as demand worldwide eases and the dollar strengthens, said Brian Dolan, chief currency strategist of forex.com.

Lower commodity prices, he said, will increase disposable income, a positive for struggling Americans and the U.S. economy.

As fear has grown over the euro, there has been a flood of money into the U.S. and Treasury notes. That means interest rates are staying low and should keep mortgage rates low, Dolan said.

For U.S. companies

"The strong dollar is a negative for corporate profits," said investment strategist Ed Yardeni. He thinks that will be particularly true of industrial companies, which will have more competition from Europe.

U.S. companies doing business abroad face currency issues, but many hedge to reduce the impact.

Still, when they do business abroad and translate profits, the stronger dollar will reduce earnings from Europe.

With European products cheaper than U.S. products, consumers in the U.S. and other parts of the world might buy from Europe instead. And Americans will be more eager to buy less-expensive imports.

"By restraining U.S. export growth, a stronger dollar will dent GDP growth" in the U.S., said economist Paul Dales of Capital Economics.

But the threat may be modest, he said, because the U.S. sends just 17 percent of its exports to the euro zone.

Still, with the low-priced competition from Europe, Dales estimates that real U.S. export growth will slow from about 10 percent this year to 4.5 percent next year, trimming GDP.

For the economy

Slower GDP growth means another hitch for the economy as it emerges from recession. But it's not all negative.

With oil prices down sharply in recent weeks, Dales estimates that could take 0.3 percent off inflation this year.

Cheaper fuel costs can help companies such as airlines, manufacturers and trucking firms.

But the United States is not the only country that could find resistance to higher-priced products with the dollar stronger.

China could also face more competition for its products, Dolan said. And because China has been the world's growth engine, lower demand for its exports is important.

"Currency can work for or against you," Dolan said. "It's stomach-churning."

For investors

The flood of money into U.S. investments means that risk-averse savers looking for alternatives to low-interest CDs and U.S. Treasurys are not likely to see near-term relief, although some analysts predict 10-year Treasurys now yielding 3.35 percent could be at 4.5 percent by the end of the year.

Investors who bought European mutual funds or other currencies to bolster returns when the dollar was weak are suffering. When the euro was strong, and profits were translated back into dollars, U.S. investors made more money on the currency translation alone.

Now, Americans are losing in two ways — on the expectation of declining profits in some countries, and on the currency translation. For example, this year, Germany's main index, the DAX, is up 3.3 percent, but in dollars investors would have lost 12.2 percent.