It's like a summer movie: the incredible shrinking dollar.
Since the beginning of the year, the buck has shrunk 5 percent – the equivalent of a 20 percent annual decline – compared with the pound and the euro.
But the shriveling value of the dollar may eventually help solve one of the most intractable US economic problems: the enormous trade deficit, which hit $63.9 billion in March, the highest level since September of last year.
Already, giant European companies are taking advantage of their strong currency by announcing huge investments in the United States. And US exporters such as Boeing and Caterpillar are getting an order boost as the lower-valued dollar allows them to undercut their competition.
"The forces are in place now to slowly over time cause the trade deficit to shrink," says Jay Bryson, a senior international economist for Wachovia Securities Research in Charlotte, N.C.
The change in the dollar's value also comes with ramifications for US consumers. It's now more expensive for Americans to travel abroad. Italian leather, Belgian chocolates, and English cheddar will cost more. In addition, many Americans may find they have a new boss – one who is based overseas or relocating to the States.
Nearly every day, the US imports about $3.5 billion more than it exports. At the same time, the European Central Bank is in the process of raising interest rates, while the US Federal Reserve is holding rates steady and may even lower them later this year. "This makes buying US securities not as attractive," says Mr. Bryson.
The British and European central banks can raise rates because their economies are growing faster than the US's. "When an economy is growing faster and it's raising its interest rates versus the stable rates in the US, it favors the currency of the faster-growing country," says Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.
In recent weeks, as the dollar has weakened, a number of European companies have announced major investments in the US. Earlier this month, the giant German steel company ThyssenKrupp announced it would build a $4.18 billion plant in Alabama. And on Tuesday, BMW said it would increase its production of vehicles at its Spartanburg, S.C., plant – from 140,000 cars a year to 200,000 cars a year. At its annual meeting, the company's chief executive, Norbert Reithofer, said this was a way to reduce the foreign-exchange risks for the dollar in its largest market.
Overseas, the change is already forcing Europeans to adapt. In Torri, Italy, Il Colombaio Bed and Breakfast, which is nestled at the edge of a walled medieval village in Tuscany, used to be filled with Americans – more than 90 percent of guests. But this year, only a handful have come – less than 5 percent.
"It's amazing," says Sumito Barabara Viale, who has run the B&B for nine years. "It dropped because of the euro. It's so expensive to come here now."
Hoteliers, shopkeepers, and restaurateurs across Tuscany are experiencing a similar dearth of American tourists, Ms. Viale says. They've been replaced by English, German, and even other Italian visitors. The change first became apparent after 9/11, when many Americans opted to vacation closer to home. After recovering a little, the number of American tourists began to drop steadily as the euro gained strength against the dollar.
Travelers say their higher expenses are not just due to exchange rates. Lily Blitstein, who is planning a trip to London to visit her fiancé, recounts her search for affordable airfares. "Prices jumped $200 in 10 days' time," she says. "I guess it's the price of fuel and everything else."
Travel agents say many Americans who still want to go to Europe are opting for Eastern European countries, where many of the hotels and cruises are priced in dollars. "Our bookings to Poland and Russia are up 100 percent. To the Czech Republic, they're up 143 percent," says Mike Pina, manager of public relations for AAA in Washington.
River cruises on the Danube are so popular this year that they are nearly sold out for September and October, says Adriane Greene, president of Welcome Travel Agency in Lake Ronkonkoma, N.Y. "I know companies are already planning to bring ships to Europe for next summer," she says.
The pressure on the dollar is squeezing the profits of many European businesses. Steve Jenkins, who buys olives and cheeses for Fairway Market in New York, says he's been able to hold off on price increases because his European suppliers are absorbing the currency change. "I do feel cosseted by my European artisans," he says.
For Australian visitors to America, the lower US dollar also makes a difference. Clover Moore, the lord mayor of Sydney, who was recently visiting New York for the first time, says prices in the Big Apple seem quite reasonable.
• Alexandra Marks contributed to this report. Material from the Associated Press was also used.