Expatriates feel the euro's pinch

No gains foreseen in exchange rate

Francesca DeMeo, an American student in Paris, has exchanged her apartment for a less expensive dorm room, and culinary delights for meals on the cheap. (Christophe Petit Tesson/WPN for The Boston Globe)

PARIS - Francesca DeMeo moved to Paris from Massachusetts last year with visions of glamour and adventure. She would travel Europe, entertain friends at her posh apartment, study at the world-renowned Paris Observatory, and indulge her gastronomic fantasies.

But the euro, which turns 10 years old on Jan. 1, has laid waste to DeMeo's dreams as well as those of Americans across the continent. They weren't counting on the demise of the dollar against the euro, which is now worth $1.40. That represents a roughly 50 percent drop in the dollar's value since 2000.

As a result, Americans living in Europe, who were already struggling to make ends meet, are finding it even more difficult as the value of their US savings plummets and Europe grapples with economic turmoil of its own. Students and expatriates have had to adjust their lifestyles; businesses that employ Americans in Europe have been forced to pay more dollars to keep up; and US retailers with European outlets have scaled back operations and sustained losses.

DeMeo, a 24-year-old Fulbright scholar, has moved out of her apartment and into an inexpensive dormitory room half the size. She buys food at cheap outdoor markets instead of chic charcuterie shops. With a limited stipend to live on, she spends her free time tutoring French students in English and baby-sitting for extra pocket money in euros, rather than traveling freely around France, Italy, and Spain.

"I avoid at all costs using my dollars from my American bank account," DeMeo said.

The almighty buck bottomed out against the euro in July, before rebounding slightly as a result of the global financial crisis this fall. But some economists say the dollar's modest four-month rally was just a bubble - and given a 10 percent tumble in the past three weeks, it may have already burst. Moreover, they worry the dollar may soon plummet to record lows as the US government aggressively increases its debt to fund a bailout of Wall Street financial firms and other industries, and as the American economy sags. That would put an even tighter squeeze on American students, expatriate employees and retirees, and businesses across the Atlantic.

"The US dollar recovery will not be sustainable," said David Woo, head of foreign exchange strategy at Barclays Capital. "We expect both the pound and the euro to appreciate against the dollar in the months ahead."

The plunge in the dollar has cost Framingham-based Staples Inc. more than $400 million in its bid to acquire a Dutch rival, Corporate Express. In February, Staples made its first offer of 2.5 billion euros for Corporate Express, worth about $3.7 billion at the time. The deal was rejected several times until Staples raised its bid to 2.7 billion euros. That would have been nearly $4 billion in February, but the dollar weakened so much during the months of negotiations that by the time Staples completed the acquisition in July, the price had soared to $4.4 billion - about $400 million more.

"Obviously it would have cost us less a year or two ago because we bought the business in euros," Staples chief executive Ron Sargent said. "We're certainly concerned about the devaluation of the dollar."

Some US businesses with offices in Europe have raised salaries and cost of living adjustments to make up the difference for workers living abroad.

To make matters worse, the British pound has also pummeled the dollar for much of this decade. During the past five years, Bingham McCutchen, a Boston law firm, saw the cost of living adjustment for lawyers in London nearly double to an industry average of about $90,000 because of the weak dollar and annual increases. To guard against exchange-rate fluctuations, Bingham pays its expatriate employees in the London office according to a fixed exchange rate of 1 pound to $1.65. The firm makes up the difference whenever the exchange rate goes above that, including in 2008.

"These are extraordinary times," said Jay Zimmerman, Bingham chairman. "The external market is always changing, as the current conditions have demonstrated. So our strategy is constantly changing as well."

Other companies have decided they could no longer make the numbers work for doing business in Europe. In the spring, Talbots Inc., the struggling Hingham clothier, shut the remaining three of its six UK stores.

"Operating costs were very high, making it difficult to meet our target . . . for return on investment," said Julie Lorigan, a Talbots spokeswoman.

As US companies grapple with the weak dollar, American expatriates are trying to cope.

Jon Koch, a US defense contractor who has lived with his family in Europe since 2002, said he has seen his purchasing power diminish.

Koch, 33, his wife, and two daughters have slashed spending, scrimped on vacations, and attempted to save money by buying big ticket items in the United States, where they can pay in dollars.

In July, when the dollar hit a low against the euro, the family visited the United States and stocked up on clothes and iPods.

"It's been painful to our wallets and certainly changed our spending habits," Koch said.

For Colette Parra, 66, who receives her retirement pay in dollars from a United Nations agency, the weakening dollar is a growing concern. To stretch her money, she isn't buying as many clothes, is taking fewer vacations, and is dropping her supplemental health insurance.

"The dollar has gone up a bit, but I continue to be worried," Parra said.

Jenn Abelson can be reached at abelson@globe.com.