New York (CNN/Money) -
The once mighty U.S. dollar is down and falling. A year ago, Americans who exchanged their George Washingtons for Europe's new currency got back a euro and change.
Today the dollar is trading at a three-year low against the euro and worth almost 22 percent less than it was at its highest point, October of 2000.
Europe's not the only place where the dollar is losing its luster. In Japan, it's down 11 percent against the yen. In South Korea it's fallen 10 percent since last year.
The strength or weakness of the dollar is largely a reflection of foreigners' demand for American "things," including investments, and goods and services. Recently, foreign investors have shied away from buying American stocks and bonds.
"Iraq is an issue," said James Doyle, portfolio manager for Causeway Capital Management. "For the first time in a long time, risk aversion means selling U.S. dollars."
I was planning a trip to Europe. Is it too expensive?
In countries where the euro has replaced local currencies -- Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain -- American tourists can expect to pay about 15 percent more for hotels, meals and museums than they did a year ago.
While there's no doubt that Europe is considerably more pricey than it was a year or two ago, the dollar is about where it's supposed to be -- on par with the euro.
The best way to understand how much the U.S. dollar is worth in another country is to look at local prices and then consider the exchange rate. The Economist does this using the price of McDonald's Big Mac, which costs $2.65 in America.
Right now a Big Mac will cost Americans $2.87 in the European Union, which is only slightly more than what you'd pay here. In Britain, where the pound has been stronger than the dollar for years, a Big Mac will cost you the equivalent of $3.19.
Then again, in Canada, Mexico, South America and much of Asia, Americans still have a great deal of purchasing power. In Argentina, for example, you can feast on two all-beef patties for just $1.18 cents.
What does this do to the price of Volvos, Nintendo and Bordeaux?
Ten years ago, fear that the dollar would decline more might have been reason to run out and buy the imported car you'd had your eye, but this is no longer the case.
According to Joe Cashen, director of pricing strategy for CarsDirect.com, foreign auto makers have gone to great lengths to make sure that currency fluctuations don't affect prices in U.S. markets. "The majority of Asian cars sold in the U.S. are actually made in the U.S." he said, noting that BMW makes some of its models in this country while Volkswagen has a large production plant in Mexico. Volvo, meanwhile, is owned by Ford, GM makes Saabs, and Mercedes is the German stepchild of DaimlerChrysler.
The same can be said for most other imported consumer goods, particularly electronics, where competition is constantly pushing prices down.
"A manufacturer cannot charge more tomorrow for the same digital camera he's selling today, no matter what the currencies are doing. It would have a total evaporation of sales," said William Valentine, president of Valentine Ventures, a firm that manages investments for high-net worth individuals.
According to David Ingram, director of international economics for Economy.com, foreign firms typically absorb any depreciation in the dollar by taking a lower profit margin in lieu of having to raise prices for U.S. customers.
"We have increased prices on some goods about 5 to 10 percent since July, but that's because the price of shipping a palette from the South of France to Normandy has gone up so much because of high gas prices in Europe," said Michel Bouvier, president of French Feast, an online seller of French specialty foods that's based in New York.
Wine lovers, it seems, also need not worry about paying more to uncork foreign vintages. "The weakening dollar hasn't affected wine prices at all," said Peter Ekman, president and CEO of Wine.com, noting that foreign vintners have flooded the market in recent years and created a wine glut. "Unless you are a screaming eagle with very limited production, if you increase prices you'll kill yourself."
My broker says it's time to put money in foreign stocks. Is he right?
"Right idea, wrong reason," said Valentine.
In theory, American investors can protect themselves from a weakening dollar by investing in foreign markets where the currencies are strengthening. If the dollar continues to fall, these investments will be worth more when converted back into dollars.
What's happening with the dollar is a good lesson for why it's smart to allocate a percentage of your portfolio to international investments. But that doesn't mean you should run out and invest in a foreign mutual fund simply because the dollar is weakening.
"Most mutual fund managers don't even hedge their currencies because it's so difficult to predict currency movements, and over the long term currency fluctuations tend to balance themselves out," said Gregg Wolper, senior fund analyst for Morningstar.
A weak dollar must mean the economy's really in trouble, right?
Believe it or not, a weak dollar could be good news for the struggling U.S. economy. Now that it costs less for foreigners to buy U.S. goods and services, companies may see a rise in demand for their products.
At the same time, a weak dollar gives a soft landing to recessions by staving off deflation. "Deflation is about the worst thing that can happen in a recession," Valentine said.
It's also worth noting that the dollar came to be so strong not just because of foreign investors' love affair with the U.S. bull market but because of their lack of confidence in other parts of the world. The fact that they're putting some of their money in other countries may actually hint at better times for the global economy, and that's not a bad thing.