The sharp fall of the dollar against the euro threatens one of European carmakers' last bastions of profitability.
While profits on new-car sales are under growing pressure in Europe, the strong American dollar made European cars super-sellers in North America in recent years. The result has been fat profits for companies such as BMW and Porsche.
But the dollar has fallen 9.4 percent against the euro since its high in January. European car companies say they are well protected by hedging strategies, at least for now. But analysts say a prolonged slump in the dollar's value means trouble.
'The US market has been an absolute godsend for German manufacturers since 1996,' said Garel Rhys, automotive researcher at Cardiff University in Wales. 'The deutschmark has been undervalued since 1996.'
German manufacturers could face a serious threat.
'They will have a hard time increasing their prices, though they're in a premium sector of the market,' said Hendrik Emrich, automotive analyst for Berenberg Bank in Frankfurt. 'Also in those premium segments the market is getting more competitive. If you increase prices, you have a direct impact on the demand for your cars.'
Indeed, Jaguar, which make its cars outside Europe's euro-zone, sees some potential in the weak dollar.
'We manufacture in pounds, while [BMW, Mercedes Benz and Porsche] make in euros,' said Jaguar chief spokesman Stuart Dyble. 'But we both sell in dollars. There could be a small opportunity for us.'
Said Xavier Gunner, auto analyst for UBS Warburg in London: 'If this carries on for next two, three years [German manufacturers] will have to start thinking carefully about pricing strategy.'
Porsche has the biggest exposure. The Zuffenhausen, Germany, manufacturer of sports cars has no US factory, and it sells about 45 percent of its cars in North America.
Porsche learned a difficult lesson in the early 1990s when the US dollar crashed. Porsche's financial fortunes plunged as a weak US dollar made its models unaffordable in the company's largest market.
'Porsche had very bad experiences in late 1980s and early 1990s when the dollar weakened extremely and Porsche made losses,' said Manfred Ayasse, Porsche financial press officer. Indeed, Porsche lost about 220 million during a three-year period in the early 1990s.
'We decided we will never see such an experience again and today for Porsche with its high US exposure, hedging is an absolute priority,' he
said. 'The US dollar is hedged and also the British pound and Japanese yen. All these currencies are hedged for more than two years forward. So we are not hurt by the weaker dollar now. We can take profit from the hedged exchange rate.'
But since Porsche is very dependent on the American market, that degree of exposure increases the longer the euro goes up against the dollar, said Rhys.
'The further forward you go the higher the risk to foreign exchange traders,' Rhys said. 'Three or four years forward and the hedging ends because the cost of doing it is so high.'
Car companies can protect themselves against currency fluctuations in two ways.
They can limit their exposure by establishing production in export markets - such as the BMW and Mercedes-Benz plants in southern USA.
Or they can buy foreign currency on forward contracts to offset risk. Financial hedging is essentially betting on currency movements. For example, if a stronger dollar hurts a company, it places contracts that pay off if the dollar strengthens. Profits on the hedge offset losses on the primary business.
In response to the weak dollar of a decade ago, BMW and the former Daimler-Benz set up production in North America.
BMW built a plant in Spartanburg, South Carolina, USA. Daimler-Benz built one in Tuscaloosa, Alabama, and eventually bought US carmaker Chrysler.
DaimlerChrysler claims it foresaw a falling dollar value earlier this year.
'We have always followed a rather conservative and long-term hedging policy, and did so again on grounds of the expected lower rate of the dollar against euro,' said spokesman Thomas Froehlich in Stuttgart. 'For this reason, we don't have to increase our American prices for the moment or near future.'
He also said that the recent falling dollar is not yet worrying, 'but we don't know if the dollar will stabilize.'
Martin Nellen, BMW head of foreign exchange management, said: 'We are basically forecasting our risks. We are looking on the equilibrium rate of euro and US dollar. US dollar is overvalued against the equilibrium rate. The further we are taking hedges on board.'
Nellen said BMW looks five or six years ahead.
'BMW is very well hedged,' said UBS Warburg's Gunner.
Volkswagen said it is not concerned about the weakening dollar.
'Volkswagen does not see any reason to increase its US prices because of the lower dollar,' said spokesman Kurt Rippholz in Wolfsburg. 'Our prices in dollars won't change for the moment.'
All European industry is very dependent upon the strong dollar, said Hans-Olov Olsson, chief executive of Sweden's Volvo Car. 'Therefore we are continuously [monitoring] where the breakeven is on the US dollar and the Swedish krona. We have to be sensitive to the breakeven level.'