European Central Bank rate cuts triggered drop in euro value: Americans should vacation there.

The Euro Is Dropping—Time for a Vacation to Paris?

The Euro Is Dropping—Time for a Vacation to Paris?

Moneybox
A blog about business and economics.
Sept. 12 2014 10:13 AM

Time for a Vacation in Europe?

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Bonjour, cheaper currency.

Photo by Antoine Antoniol/Getty Images

This article originally appeared in Inc.

What happens when your central bank cuts interest rates and the value of your currency declines? If you were America in 2009, following the financial crisis, you would have seen a flood of tourists breaking down your doors for cheap vacations and to go on shopping sprees for iPhones, designer jeans, and the like.

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Well guess what: Five years later, the tables have turned. In the wake of the European Central Bank's decision to cut its main interest rate last week, which instantly caused the value of the euro to drop, Americans are expected to return the favor, pouring millions of dollars into the Old World as the value of goods and services decreases overseas. 

While that may help the various struggling countries that make up the EU, the U.S. is expected to see a shortfall of tourists, which could wreak havoc on cities that depend on income from their vacations. Among those metropolises is New York City, which could experience a drop off of up to $30 billion in tourism dollars in the next year, or 50 percent of the current total, according to the New York Post.

Last week the European Central Bank cut its interest rate, for the second time this year, to 0.05 percent. It also sliced its deposit rate to below 0 percent, in a bid to get banks lending again. (The negative rate would effectively punish banks for hoarding cash.) Both moves, in turn, caused the euro to fall. It is now down more than 7 percent since May, at around $1.29.

In fact, the euro is expected to reach parity with the U.S. dollar by the end of 2017, according to a recent report from Goldman Sachs.

While that's good news for vacationers, it's bad news for U.S. exporters, many of whom have benefited from years of a weakened dollar. Since the recession, about one third of the U.S. economic growth has been fueled by exports, U.S. Secretary of Commerce Penny Pritzker said recently in a news conference. Over the past four years, exporters have set records, exporting $2.3 trillion worth of goods in 2013 alone, Pritzker said.