Travel agents across Europe have already covered most of their flights to the US over the Easter holiday. And there is no doubt in anyone’s mind what the reason is. On March 9, 2008, the dollar was trading at $1.54 per euro, some 80% higher than in October, 2000. Consumers were going haywire trying to be the first to take advantage of some rather cheap travel plans to the US, booking flights at unusually high rates. Yes, shopping sprees definitely figure in most, if not all travel plans this spring.

However, amidst the blooming roses in the garden, certain weeds have begun to appear. A cheap dollar for Europeans may actually be a recipe for disaster.

German automaker Volkswagen for example, has already cancelled a rather voluminous export order to the US, where they are simply unable to compete with lower prices offered by American made cars. The truth of the matter is that exporters around Europe are feeling the pain of losing their competitive trade advantage, all due to a rising currency exchange rate. Prices of exports have risen along with the FOREX rates, making competition with American products inconceivable.

But Germany is certainly not alone. Other countries such as Ireland, have seen trade orders diminish at alarming rates. Not just for products made in Europe and shipped to the US, but also those which are normally exported to nearby England. The fact is that Ireland seems to be stuck between a rock and a hard place, with nowhere to run, nowhere to hide.

Surely there are positive consequences from a falling dollar, but the overall effect on the economy around the world all points to an overall slowdown. Among the positive ones for Europeans is that oil, priced in US dollars, will be far cheaper for them in comparison with non-EU countries. There are also trade advantages for companies manufacturing in Asia and selling in Europe.

But increased buying power for Europeans is not all it’s cracked up to be. While eager consumers may find a strong incentive to keep rates where they are, European manufacturers are being forced to reorganise their outsourcing plans to manufacturing in the US to avoid the rising price of exports. A process known as natural hedging. But all of these changes cost companies huge amounts of money when making the transition from the previous system to the next.

European services will find less American tourists this year with the added pressure on many establishments to fight for survival. In a perfect world, where global supply and demand balance at their point of equilibrium, currency rates will most likely remain the same. But as foreign exchange rates continue to fluctuate in the real world (even in a downward path like the dollar) – the effects can send devastating shockwaves into the system. Of course, what goes up must come down, so the euro will most likely come back down – but not any time soon, especially as the real estate and mortgage markets continue to fall further into recession in the US. We can only hope to keep the damages to a minimum at this point.

Photo credit: http://www.flickr.com/photos/cmpalmer/99806770/