An expat's view of the falling dollar

A mere seven years ago, you could order an orange juice or milkshake at a cafe in the leafy Athens suburb where I live – and pay, at most, two bucks. No more. Like the three or more million Americans living abroad, many European and Middle Eastern users of Uncle Sam's greenbacks have watched the cost of a single euro rise from 82 cents at the euro's inception a decade ago to around $1.60, before easing a bit to around $1.55.

The US dollar seems to have timidly begun its recovery from its drastic, five-year-long slump against the muscular euro. But what's needed now is strong support to sustain and speed up the dollar's recovery.

Directors of the European Central Bank (ECB) in Frankfurt, responsible for fiscal policy in the entire eurozone, have the ability to help the dollar by lowering the ECB's interest rates. These rates encourage investors to buy or use euros rather than dollars or other currencies. This is a difficult task where old habits die hard and the low dollar means great deals for European tourist shoppers in American cities.

But the euro's previously unchecked rise drew concern last year. Some European financial analysts put part of the blame on the huge US foreign deficit and other current weaknesses of the US economy, as well as on US exports of products like cars which have benefited from the weak dollar.

ECB President Jean-Claude Trichet, drily remarked that it would be good if financial markets would take the Bush administration's assurances that it really wants a strong dollar seriously – implying that many markets don't.

European exporters to the dollar zone suffer losses from their sale of products such as premium olive oil. Low competitiveness has brought stagnation and higher unemployment, especially in Italy and Portugal, and almost a recession in Spain.

An obstacle to dollar and general economic recovery lies in skyrocketing commodity prices. Oil has breached $125 a barrel. The OPEC oil cartel's president warns that oil could reach $200 a barrel, largely because of the market being drawn down by the dollar's slide, as the Economist magazine reported.

Analysts at global investment bank Goldman Sachs say it's the other way around: Oil price increases cause the dollar to fall. They argue that there's a 95 percent correlation between the oil price and the dollar/euro rate over the past year. Since oil is still largely paid for in dollars, higher oil means a lower dollar.

There's nothing the ECB can do about rising fuel and food prices, say European economic experts. But it can help the dollar and fight inflation by lowering its euro rates.

Mediterranean-area bankers emphatically agree. They hope a cut would reduce inflation – which here in Greece has risen to 4 percent, far above the ECB's prescription for the eurozone of just under 2 percent – and make it easier to sell Mediterranean olive oil, citrus fruits, and other products to the US.

As France prepares to take over the rotating presidency of the European Union July 1, French President Nicolas Sarkozy has also indicated his concern about the euro's rise. France could press for such help by the ECB during that term.

Ideally, intervention – buying up large quantities of US dollars – by the ECB would be a great boost for the dollar. Europe's relative economic stability (banks caught in the US-generated sub-prime mortgage crisis excepted) may continue to deter the ECB from cutting rates or undertaking massive intervention.

But in the end, such measures may be the only way to ease the business and personal woes of folks in Europe, tired of paying as much as double or triple in dollar equivalents for food, drink, or gasoline as they did a year or two ago.

Leaders in Washington should be willing to show they are as serious as the US Treasury says it is about restoring a strong dollar – a symbol abroad of American power and prestige.

They could cut as much foreign borrowing and unnecessary spending as possible, and craft a real national energy policy that truly reduces the demand, and the price, of imported oil.

• John K. Cooley is a former Monitor correspondent who's been living in Greece since the euro's introduction. His latest book is "Currency Wars."