By Ernest Beck, MSN MoneyThe plummeting value of the U.S. dollar has made stark headlines over the past year as politicians and economists have debated the causes and consequences of the once-mighty greenback's fall from grace.
But the full impact of the sliding dollar didn't come home for Gregg Buchbinder, the chief executive of Emeco, a Pennsylvania manufacturer of high-end design furniture, until he made a business trip to Milan, Italy, this year. 
Making money off the weak dollar
At the city's annual furniture fair, his company's chairs -- some of which, such as a polished bar stool, go for $3,000 a pop -- were in demand. One reason: With the dollar down around 40% against the euro since 2002, Emeco's made-in-America chairs not only look good, but also are a good value for European shoppers. Who buys a $3,000 chair?
"Europeans always liked our products but said they were too expensive," Buchbinder recalls. "Now they are considered reasonably priced."
That's the good news. And the bad? Buchbinder shelled out more than $400 a night for a hotel room in Milan. With the weak dollar buying much less luxury than it used to, it's a problem faced by Americans traveling abroad.
From Wall Street to Main Street and all the way to the Champs-Élysées, Americans are reckoning with the impact of the declining dollar and what it means for their businesses and daily lives. So how will it affect you? The answer depends on who you are, how you make and spend your money, and, perhaps, to what extent your sense of self-worth is tied to your identity as an American. Map: See the dollar's slide
For U.S. companies, it could mean a sales boost for exports, because the cheap dollar makes their products cheaper. Foreign tourists on shopping sprees
For travelers and those with a craving for foreign luxury goods -- Gucci boots, perhaps, or a fancy German sports car -- expect higher prices. And if you have been getting stung by sticker shock at the gas pump or in the grocery store, you can partly blame the sickly dollar, because most commodities are traded in dollars.
Moreover, the weak dollar and other economic woes, such as the subprime-mortgage crisis, together convey a symbolic message to the world -- one that says "confidence in the U.S. economy has been eroded," notes Mauro Guillen, a professor of international management at the Wharton School in Philadelphia. That wasn't always the case. Since the end of World War II, Americans had always assumed the dollar would be strong and a dominant force in global trade and commerce.
But that was before the current economic mess. Now the national deficit is soaring, and the euro -- whose strength has taken many by surprise -- has risen to challenge the dollar's supremacy. Chart:How the dollar stacks up
As a net debtor nation, the U.S. lives beyond its means, buying and importing more goods from abroad than it sells, thereby creating a trade deficit, while the government spends more than it takes in, leaving a budget deficit.
That means the government is forced to borrow billions of dollars every day -- much of it from China and the central banks of other nations -- by issuing debt, such as U.S. Treasury notes, to help pay for the budget and current-account deficits.
The overall impact, economists say, is that the global market now takes a more cautious view of the relative strength of both the U.S. economy and the dollar itself.
Back at the euro's launch in 2002, the notion of a unified European Union currency "was a major experiment, and many were skeptical that it would work," explains Lawrence White, a professor of economics at New York University's Stern School of Business. "But it has worked very well," he says -- and its success has placed added pressure on the dollar.
To be sure, the dollar still has tremendous clout. Despite the euro's growing stature, the U.S. currency accounts for 86% of daily global currency transactions, as well as two-thirds of the world's central-bank currency reserves.
But there's no easy fix to strengthen it. Paul Horne, an international market economist and contributor to The European Institute's journal, European Affairs, says a solution would have to include changing fiscal policy to reduce U.S. dependency on borrowed foreign capital, raise the rate of savings and curtail private consumption.
Such measures, however, would be "politically unacceptable, especially at a time when the American consumer and his living standards are already hit by rising energy costs and a credit crunch," Horne says. The U.S. might also risk a serious recession, or worse, because the measures would probably involve sharply raising interest rates.
As a result, Horne's gloomy assessment is that "politicians of all stripes and consumers will have to settle for more inflation and a weaker dollar," he says.
In the meantime, businessmen such as New York real-estate developers David Kislin and Leo Tsimmer are revising their marketing strategies to attract more wealthy European buyers.
Kislin and Tsimmer, general partners in Sleepy Hudson, recently went to Italy with a road show to sell units in their latest New York building, a condominium project called Five Franklin Place, where units range from $2 million to $16 million. The pair previously hadn't considered marketing directly to Europeans, but buyers from outside the U.S. are now saying that because of the weak dollar, buying a New York condo means getting more for their money.
For these buyers, in addition to the building's unique architecture and design and luxury fittings, the weak dollar is a major attraction -- "the absolute economic icing on the cake," Kislin adds.
U.S. consumers, unfortunately, have fewer ways to capitalize on the dollar's weakness. For most, the best response is a defensive play: Those traveling abroad, for instance, might want to know that some hotels and car rental companies lock in dollar prices, letting you avoid exchange rate fluctuations. (You might also want to look beyond favorite European destinations to, say, Argentina or South Africa, where the dollar is still relatively strong.)
Meanwhile, for economists and policymakers, the lingering question is whether we should try to do anything about the anemic dollar at all.
Some argue that market forces will eventually bring the dollar back, as confidence in the U.S. financial system revives. After all, the Chinese aren't likely to cash in their dollars anytime soon, these people say, and the world still finds the U.S. a prime place to invest its money and buy stocks, despite the recent economic bumps.
Yet that might not hold true forever.
"There are limits," warns economist White. "If the dollar drips lower and at some point the Chinese and the Europeans say they don't want to hold dollars, and they all rush to cash them in, then it could be a very nasty situation."
That nasty situation, if it happened, could cause a global run on the dollar, with nations such as China trying to cash out of trillions of dollars held by its central bank. In turn, this might cause a rupture in the worldwide financial network and lead to major restructuring as central banks tilted toward the euro or another currency. Such dire implications are why many economists believe it is in China's best interest to continue to hold its dollars despite their sinking value.
Return to the series home page
Published July 28, 2008
Produced by Elizabeth Daza/Graphics by Joe Farro and Hakan Isik
High