I think I might like to go on a vacation to Europe next summer, but, as an American, I’m scared by the weak U.S. dollar. I was last in Europe in 1999 and 2000, when the Euro had just debuted. Back then, a euro was worth substantially less than a dollar and the cost of most things, from restaurants to hotels to Metro rides, looked pretty reasonable.
But with each euro now worth about $1.46, I could be set for a very expensive European vacation.
So I was happy to read a recent report from currency analysts at Browns Brothers Harriman. BBH analysts think the dollar is undervalued and will bounce back in 2008. By the third quarter of ‘08, the euro could be at $1.36 and by the end of the year it could hit $1.32, they say.
Much of the recent drop in the dollar is due to interest rate cuts by the Federal Reserve and a slower U.S. economy. (And it’s important to note that, pain for U.S. tourists aside, a weaker dollar may be a sign of weakness but it can actually benefit the U.S. economy. As I wrote last month.) But the dollar could revive if, as some expect, European central bankers follow their U.S. counterparts and eventually start cutting rates too. If the U.S. financial crisis gets worse and the Fed cuts rates even more deeply, it might hurt the dollar. But it also might spur the United Kingdom and Europe to cut their rates even earlier.
Of course, currency movements are notoriously hard to predict. But if I’m feeling optimistic I just might start shopping for flights one of these days.