The Dollar: A Bottom at Last?

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The price of oil is up almost 17% since the beginning of the year when priced in dollars, but it's still up 11.6% in euros.

Big Companies Benefit

Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN), worries that U.S. companies, particularly small and midsize businesses, aren't getting enough of a boost from the weak dollar. U.S. firms have been slow to find ways to profit, even if, he says, "Everything U.S.-made is on sale for the rest of the world."

"We are not getting the benefit of this, but we are paying higher prices for commodities and [the high euro is] slowing down the European economy," Gambera says.

The falling dollar clearly has helped large U.S. companies, however. At companies with hefty overseas sales like IBM (IBM) and Intel (INTC), a rise in foreign currencies also boosts the bottom line. "If we see a meaningful bounce in the dollar, that's going to work against their earnings growth in coming quarters," says Keith Hembre, chief economist at First American Funds.

The future direction of the dollar depends on a wide, complex array of variables, currency experts say. Factors that could weaken the dollar further include more financial instability in U.S. markets, more interest rate cuts from the Fed, and evidence of slower-than-expected U.S. growth. Giving the dollar a boost would be signs of U.S. economic strength, such as May 2's better-than-expected data on employment and factory orders, or indications other economies are slowing down and foreign central banks are set to cut their interest rates.

Advantage U.S. for Now

Even if the dollar stops its slide, it will remain quite cheap by historic standards. Against the dollar, the euro has jumped 37% from five years ago, when it was trading at $1.12. As any American tourist in Europe will tell you, the dollar's purchasing power has also fallen to what seem like artificially low levels.

In the global marketplace, the weak dollar could give the U.S. a cost advantage for the next few years. To global investors and business people, American workers and assets look cheap. "People already are moving production facilities to the U.S.," says Browne. "Because of the weaker dollar, we think U.S. assets will be appealing to international investors."

But those advantages will be small comfort unless the U.S. can revive economic growth, shake off its nasty housing and mortgage crises, and weather higher food and energy prices. Whether or not the buck regains its bang, that's a tall order.

Steverman is a reporter for BusinessWeek's Investing channel.