NEW YORK - The way investors have unloaded the U.S. dollar lately, you'd think it was kryptonite.
It has fallen 10 percent against the euro in just three months, and recently hit a 15-year low against the Japanese yen. You'd have to go back even further to find the American currency in a weaker position versus the Swiss franc or Australian dollar.
The decline has been so dramatic that fear is spreading of a "currency war" akin to the one in the Great Depression, when countries competed to drive their exchange rates lower.
It sounds like a downer: Strong countries are supposed to have strong currencies. But when a country is struggling to grow as the U.S. is now, a weak currency can act like a shot of adrenaline. Here's how:
EXPORTS
A falling dollar is like slapping a "For Sale" sign on U.S. goods and services abroad. Consider the price of an iPhone in Paris before and after the dollar dropped. At exchange rates in July, a $99 iPhone with 8 gigabytes of memory would have been worth about 78 euros. Now that price translates to 71 euros.
Cheaper prices bring higher sales, and hopefully more jobs at home for companies selling products overseas. The impact could be huge: Companies in the Standard & Poor's 500 get half their revenue abroad.
IMPORTS
A falling dollar raises the price of foreign goods sold here. That makes it more likely that Americans will buy cheaper rival products made by U.S. companies. But the impact on the economy is not all good. First, the boost to U.S. companies is less than you might assume because so many goods made here contain parts made overseas. If those parts cost more, so will the price of U.S. finished goods.
Consumers suffer from higher prices on imports, too. Not every foreign good can be replaced with a U.S. one. Someone who simply can't go without Parma ham, Bordeaux wine or New Zealand lamb chops may have to shell out more.
OIL
The dollar's dive jacks up the price of oil, though the cause and effect takes a bit of explaining.
When the dollar is weak against the euro and yen, as it is now, the French and the Japanese can buy oil on the cheap even if prices hold steady.
If that sounds odd, consider that oil is unlike many other imports: It's bought around the world in dollars, not in each country's currency. That means the French and the Japanese can buy the same number of barrels with less of their own currency because they first have to buy dollars, and they need fewer euros and yen to do that than before.
By itself, this drop in the cost of oil in other countries neither hurts nor helps the U.S. But countries faced with cheap oil tend to buy more of it, driving the dollar price of a barrel up.
This is one reason oil spiked to nearly $150 a barrel in 2008. Every country gets hurt when the dollar price rises, but the U.S. gets hurt more than others because it has no exchange rate advantage to compensate.
"If the dollar goes down … it costs the average American every time they fill up their tanks," says Walter Zimmerman, chief technical analyst at brokerage United ICAP.
FOREIGN STOCKS
You might think a stronger dollar would help goose the returns of foreign stocks and foreign mutual funds. But that's wrong. The moment after you buy them, you should be rooting for the U.S. currency to fall. That way, when you convert your winnings back to dollars, each unit of the foreign currency in which the shares are valued will fetch more dollars.
To see how that works, consider U.S. investors in big European stocks. The Euro Stoxx 50 index is up 6 percent in three months. But if U.S. investors cashed out of the index now and converted their winnings into dollars, they'd be up 17 percent because a single euro buys more dollars than it did when they invested.
The same math helps exporters, too. Even if sales in France or Germany don't budge, revenue for U.S. exporters rises. That's because when U.S. companies convert their euros into dollars, they get more dollars.
TOURISM
Foreign tourists in the U.S. generated $120 billion in revenue last year, and if the dollar keeps falling that could rise fast as more foreigners decide to vacation here. A cheap dollar lowers their hotel and restaurant and shopping bills, at least as expressed in their home currency.
The trade-off: It's more expensive for Americans traveling abroad.
