Americans have a lot in common with the British. Other than severely overusing the word “brilliant” and being rather unhealthily devoted to dogs and horses, the English seem quite like Americans — enthusiastic consumers who are unhappy with their government, worried about inflation, and overleveraged to real estate.

That said, an American who forks over $120 for a cab ride into London from Heathrow or $40 for a croissant and coffee may be excused for thinking that something is out of whack. Although the dollar has climbed nearly 8% against the pound since last November’s low, the truth is that Americans traveling in England are at a huge monetary disadvantage. Will it continue?

Currency values are subject to the whims of supply and demand, as is true with any other commodity. Currency buyers are typically motivated by anticipated returns, in turn a function of expected interest rate trends and perceived future value. At the extreme, a country that experiences roaring inflation and that is run by a fiscally irresponsible government can expect to see its exchange rate head lower. Conversely, a country such as Switzerland, which has for centuries maintained a pristine reputation for financial security, can expect a solid currency.

Most countries fall in between these extremes, including America and Britain. While many in America have been quick to chastise the Treasury and Federal Reserve leaders for trashing the dollar in the course of resolving the credit crunch, in fact the decline in the dollar predated those recent efforts to prevent wholesale meltdowns of the financial markets. The dollar has been on the decline since 2001 compared to the pound, and since 2000 compared to the euro.

I think there are two plausible reasons for this. First, America’s government is more committed to growth than are the leaders of England or of the eurozone. Last week’s pronouncement from the head of the Bank of England, Mervyn King, that he would not lower interest rates despite the prospect of negative growth in coming quarters did not provoke the kind of outcry that might have been expected in America.

Mr. King noted that inflation was running considerably ahead of the BOE’s 2% target, and that the trend necessitated severe actions. I had the chance to ask a British cabinet secretary about this. His view was that England enjoys a “cross-party consensus” on the importance of an independent central bank. Apparently, that unanimity extends to fighting inflation — the British will choose dampening price increases over promoting growth every time. Or at least until income truly drops and people start losing their jobs.

The eurozone leadership is in the same camp. An American would have been startled by the excitement over the release of the recent economic report from Germany. The Financial Times described a “dramatic growth spurt” in Germany — in fact, it expanded by 1.5%. Admittedly, it was the best quarter in the past 12 years, but it would have been considered measly in America. Expectations are truly low, and different, on the Continent.

The difference is that the population in America is growing, and the economy therefore is expected and likely to grow as well. Germany, and several other European nations, are not experiencing increases in their population and can therefore satisfy the country’s requirements with significantly less real output expansion.

Returning to the situation in England, it is increasingly difficult to argue the merits of the current exchange rate. Although it has had several years of good growth, the country’s budget deficit is currently 3.2% of GDP, higher than most OECD countries, and above the 2.9 % level estimated for America this year. (In 2006, the figure was less than 2%.) Moreover, government spending accounts for 45% of GDP, compared to 35% in America. These comparisons will likely worsen as the housing recession takes hold in Britain, as inflation increases, as bankruptcies climb, and as jobs drop — all anticipated by those on the economic watch.

In the eurozone, the economic data similarly undermine today’s premium over the dollar. Despite the good first-quarter news, a warning shot came in the form of the PMI falling to its lowest level since August 2005. In Germany, factory orders have declined for four months in a row. A recent read on bank lending by the European Central Bank suggests that credit is tightening severely in the EU. Because bank credit drives 85% of corporate finance in the eurozone, a more restrictive bank credit environment will almost certainly curtail growth. In other words, a downturn looms.

If the economics of the case don’t totally uphold the current abysmal dollar exchange rate, the fundamentals of investing may. The group most rapidly accumulating dollars in recent years have been the exporting nations, including OPEC producers whose main export product is tied to the dollar. For decades the oil trade has led Middle Eastern nations to accumulate huge dollar reserves.

Because of globalization, the pressure on the one principal trade currency has been extreme and ultimately has led to a dollar exchange rate with many nations that was insupportable. In retrospect, an overvalued dollar may have been as penalizing to American manufacturers as China’s undervalued yuan has been beneficial to exporters in that country.

Certainly, those nations holding vast reserves of dollar-denominated assets could be excused for wanting some diversification. Serendipitously, along came the euro. Although it took several years for the euro to find its footing, the sheer size of the economies behind it, and the successful expansion of the European Community, ultimately lent it strength and credibility. Today, the euro is recognized as a suitable substitute for the dollar.

Currency values will trend higher or lower based on many factors, including expectations of interest rate trends. It is no wonder that America’s unilateral reductions in rates have torpedoed the dollar. Having just consumed London’s finest $50 club sandwich, I think the bottom has been reached.

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