European carmakers have increased prices, cut staff and trimmed marketing and incentives budgets to combat the US dollar's steep decline in value against major European currencies. The US market accounts for up to 60% of European carmakers' profits so the dollar's plunge has turned profits into losses.

According to Automotive News Europe, just two years ago, the dollar was 85 cents to the euro and $US1.42 to the pound. Now, it's more than $1.20 to the euro and more than $1.80 to the pound. Carmakers consider currency fluctuations more tactical than strategic, but a 46% swing in two years is hard to ignore.

European brands that export to the US have seen revenues from vehicle sales in dollars tumble despite significant currency hedging.

Larger, mainstream European carmakers have taken some drastic action to counteract the weak dollar. Volkswagen AG has slashed its US incentives budget by more than half. In response, top Volkswagen of America executives called an emergency meeting to appeal to the German parent to reinstate the incentives until the Passat and Jetta replacements arrive in 2005, a source said.

Volvo has cut 1,100 white-collar jobs worldwide in the past year due largely to the strength of the euro and kroner. The weak dollar also has forced Volvo to increase its US sales prices and has forced the brand to charge a higher-than-planned amount for its new S40 sedan and V50 station wagon, which arrive in the USA later this year.

Bentley's 2005 models will get a price increase "above inflation" in North America this summer, but it won't fully compensate for the dollar's fall.

BMW and Mercedes-Benz have already increased their US prices on all models. Some analysts have the euro going to $1.35 by the end of the year. If the dollar proves weak over the long term, BMW could raise prices, or shift more production to the USA, or buy more components in less costly markets.

BMW already is partly protected from dollar-euro currency fluctuations by its US assembly plant in Spartanburg, South Carolina. If the dollar remains weak over a long period, other carmakers could shift production to North America.

Volkswagen is considering moving more Golf production to its plant in Puebla, Mexico. Since the Mexican peso is closely linked to the dollar, this would offer Volkswagen some protection from currency fluctuations.

Similarly, Mercedes plans to start production of the GST sport wagon at its assembly plant in Tuscoloosa, Alabama, where it currently builds its M class SUVs.