Dollar's drop hits home

The American dollar looks pretty beat up these days, and is flirting with all-time lows against the euro.

"It means horrible things for everything coming in from Europe," said Phil Burton, owner of Barrel Builders in Calistoga, which imports oak wine barrels from France. "A barrel used to sell for a little over 500 bucks, and everybody was happy. Now it costs about $1,000."

The greenback's value has been dragged down by a sluggish economy, years of record trade deficits, government overspending and now concern over the riskiness of U.S. financial markets mired in the subprime mortgage crisis, according to economists.

The fallout has been felt across Sonoma County, from German cars costing more to travel agents raising prices for European vacations.

Analysts say the shellacking of the dollar isn't over -- meaning a year from now $100 might buy even fewer bottles of your favorite French champagne.

The dollar's precipitous drop against the euro began seven years ago as the U.S. economy suffered its first recession of the new millennium. Despite the economy's subsequent recovery, the dollar continued to fall against the euro, which was introduced in 1999 and is used by most European countries.

The dollar doesn't go as far anymore. In early 2001, $100 would buy 119 euros. Now $100 fetches only 67 euros -- meaning goods from Europe have rapidly inflated in price.

Imagine Starbucks Coffee raising the price of a small cappuccino from $2.65 to $4.63. That rate hike is equivalent to how much more a cappuccino will cost an American tourist at the famous Café de Flore in Paris, compared with seven years ago. Everything priced in Euros is 75 percent more expensive for Americans -- from a haircut to a hotel room -- because of the flagging dollar.

On the flip side, a weaker dollar means Sonoma County tourism and local exports such as wine become more attractive to Europeans and Canadians. They see America as having a nationwide sale.

"There is a slight net benefit for Sonoma County," said Robert Eyler, director of the Sonoma State University Center for Regional Economic Analysis. "Sonoma and Napa counties are poised to take advantage of the exchange rate because of California wine exports and local tourism."

But some local companies will be hurt by the dollar's decline. Imported car dealers, for example, will take further hits because European cars cost more.

"Where Sonoma County will hurt the most is luxury automobiles coming out of Europe," Eyler said. "That is probably the number one import into the county, in terms of value."

Wineries will feel the sting of inflated European prices. The increased costs of imported wine equipment cuts into profit margins that otherwise have expanded due to growing exports.

European equipment and supplies dominate some aspects of American wine production. Grape presses from Germany are popular, and oak barrels from France are used in high-end wines. Tin foil from Spain is frequently used to seal the tops of wine bottles.

"Costs of goods coming from foreign countries -- primarily Europe -- are probably up 30 percent over the last couple years," said Tobin Ginter, chief financial officer of Rodney Strong Vineyards. "Overall, it drives up our costs about 5 percent."

But the winery's exports to Canada rose about 90 percent from 2005 to 2006, due to a rapid increase in the value of the Canadian dollar that made California wines more affordable there.

Fundamentally, exchange rates are set by supply and demand. If Europeans buy more American goods, it results in more euros flooding into the United States. As the supply of euros increases in the U.S. economy, the value of the euro drops -- resulting in a stronger dollar.

However, the exact opposite has been happening. Americans have been spending more dollars to buy foreign assets -- everything from toy cars made in China to Australian treasury bonds. Foreigners have spent less on U.S. assets, resulting in a trade deficit for the United States, said Katheryn Russ, an economist at UC Davis who studies exchange rates.

"Generally you will see the dollar weaken when people have less desire for U.S. assets," Russ said.

With more dollars leaving the country than foreign currencies wanting to come in, the value of the dollar declines against other currencies such as the euro -- at least that is the basic theory of exchange rates. A multitude of other factors push exchange rates up and down every day, Russ said.

Recently, U.S. assets have become riskier and less desirable because of the financial crisis created by the subprime mortgage meltdown, Russ said.

"It will take a long time for this bank crisis to be worked out," she said. "We will probably see a gradual decline in the value of the dollar over the next year and a half."

Some currencies, such as the Chinese yuan, are pegged to the dollar. The supply and demand between the yuan and the dollar is artificially maintained by the Chinese government, which buys American assets such as treasury bonds to prevent major fluctuations between the two currencies. This makes Chinese goods more affordable to Americans, and helps explain why China has become the largest exporter to the United States, recently surpassing Canada.

The European Union allows its currency to fluctuate freely against the U.S. dollar. While generally the dollar has gotten weaker over the past seven years, daily and monthly fluctuations can result in huge gains or losses for businesses that try to time the market right and convert currency at the most opportune moment.

"It's a crapshoot," said Burton, who converts dollars into euros to import about 6,000 French oak barrels a year. "By timing the market, I made almost $130,000 just in exchange rate fluctuations in 2003. The next year I lost about the exact same amount."

Burton says he stopped trying to time the market. He now buys forward contracts that let him lock in an exchange rate for a given period of time.

At Rodney Strong Vineyards, which imports about 2,000 barrels a year, the company buys contracts for barrels two years in advance.

"The rate might go up or it might go down, but I'd rather lock in today and not have the variability," Ginter said.

Travel agencies have also raised their prices to compensate for a weaker dollar.

"We had to adjust our prices accordingly," said Megan Erlendson, manager at HMS Travel Group, the county's second-largest travel agency with revenues of $18 million. "It really has reached a crescendo starting this year."

But since the travel agency specializes in European cruises that set prices in dollars, the impact has been less than other means of traveling in Europe, Erlendson said. However, on a recent cruise to the Caribbean, she noticed an unusually large number of Europeans.

"Some people are experiencing the travel benefits of the weak dollar, and it's not the Americans," Erlendson said. "The Europeans are flocking here."

You can reach Staff Writer Nathan Halverson at 521-5494 or nathan.halverson@pressdemocrat.com.