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Dollar buying ever less of world's goods

The dollar has fallen 5 percent against the euro and the pound so far this year, the equivalent of a 20 percent annual decline.

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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.

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