# Weak dollar doesn't have to be all pain, no gain

— -- The dollar is so weak these days that panhandlers have started asking if you can spare a euro. It's so weak that Starbucks charges \$10 a cup in Paris. Coffee costs \$20 extra. Weak, weak.

The dollar has indeed taken a pounding this year. Aside from the pinch it gives U.S. tourists, though, is a weak dollar all that bad? Yes and no. In some ways, you can gain from a weaker dollar, provided you don't spend all your profits in France.

You'll need to plunk down \$1.47 to buy 1 euro, the pan-European currency, compared with only 83 cents in October 2000. The dollar has fallen about 11% against the euro this year.

The euro isn't the only currency that's been smacking the buck. It takes \$1.07 to buy a Canadian dollar and \$2.11 to buy a British pound.

If you go to Europe, you'll feel the pain. A 5-euro latte at Starbucks will set you back \$7.35. And higher prices for tourists aren't the only fallout from the weaker dollar. Here are some other consequences:

•Higher prices for imports. If you're in the market for Brazilian bongos or Canadian crackers, the dollar's tumble means you'll pay higher prices for the same goods.

•Lower prices for exports. Suppose you sold sweaters to Swedes; each sweater cost \$100. When the euro was 89 cents, a person in Sweden would pay 112 euros for a sweater. But at the current \$1.47 per euro, the same sweater would cost just 68 euros.

•Higher returns from foreign stocks and bonds. Suppose you'd bought 100 shares of the fictional Brussels Grouts, a plumbing supply firm, for 15 euros a share. At the time, 1 euro equaled \$1.10. So your purchase cost \$1,650. Now, the stock is still selling for 15 euros a share. But a euro is worth \$1.47. Your investment is now worth \$2,205, even though the stock's share price hasn't budged.

So imports are more expensive, exports are cheaper — doesn't it all come out in the wash? Not necessarily. "You can't devalue your way to prosperity," says Ronald Simpson, managing director of global currency analysis for Action Economics.

A lower dollar could, eventually, lead to lower living standards in the USA, says Sudi Mariappa, managing director at Pimco. "Our wealth as a nation — what we can buy on a global basis — will fall," Mariappa says.

If the dollar falls too far, imports could become prohibitively expensive. Should the Canadian dollar rise too high, "You won't be able to import a toothpick from Canada," says Action Economics' Simpson.

Already, consumers are feeling the squeeze. Richard Bernstein, chief investment strategist for Merrill Lynch, gives an example: the price of a New York hotel room. "A European vacationer has seen no change," because of the tumbling dollar, he says. But a U.S. tourist would be hard-pressed to find a decent place in Manhattan for less than \$400 a night.

The boost the economy enjoys from higher exports might not be worth the pain from more expensive imports.

If the dollar avoids a sudden plunge, then the changes we feel in the USA will be gradual. What Wall Street fears is a collapse of the dollar — a short, steep decline in the dollar vs. other currencies. If that happened, the Federal Reserve might have to raise interest rates to prop up the dollar. Higher rates, in turn, could slow the economy.

Most economists seem to think that the dollar's tumble against the euro is, at least in the short term, overdone. "The foreign exchange market is notorious for overshooting," Simpson says.

In the long term, though, the dollar could be headed lower. Money tends to flow to nations with the highest interest rates. A three-month German government bill now yields 3.87%, compared with 3.42% for a U.S. T-bill.

What's more, investors expect U.S. rates to fall and European rates to rise. The Federal Reserve nudged short-term interest rates down because it feared that problems in the mortgage market would hurt the banking system.

The Fed could push rates lower if the economy slows.

Europeans are more likely to raise rates. The European economy is growing, and central bankers there worry about inflation, not recession.

One other pressure on the dollar: investors. The Standard & Poor's 500-stock index has gained 4% this year — but only if you invested in dollars. Translate the S&P 500 into euros, and you're down 6.6% for the year. Similarly, U.S. investors have reaped bigger gains from foreign stocks than from the S&P 500.

Should investors continue to move money out of U.S. investments and into foreign stocks and bonds, the dollar will fall further.

Investors have flocked to international stock funds, mainly because they have outpaced U.S. funds recently. And it's a good idea to diversify your stock holdings abroad. But foreign stocks fall, too. And if there's a dollar rout, you'll still feel the pain. Suggestions:

•A dollar bear fund. PowerShares DB U.S. Dollar Index Bearish fund udn is designed to fall when the U.S. dollar rises in value, and vice versa.

•A bank CD denominated in foreign currency. EverBank (www.everbank.com) offers CDs denominated in more than a dozen currencies.

•An international income fund. These funds invest in foreign government bonds and are less volatile than international stock funds. The top-performing international bond funds are in the chart.

Bear in mind that currencies, like stocks and bonds, move in cycles. The days of the weak dollar will pass. Someday, perhaps soon, a U.S. tourist will be able to buy a souvenir in Italy without taking out a second mortgage.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.