Lynn Loring, a flight attendant for American Airlines, has been coming to Paris for 18 years, and at times when the dollar was strong, she says, "All I did was shop." But last week, walking around the Galeries Lafayette department store, she was doing more looking than buying. The reason: the dollar has been sliding against the euro, and that's making everything much more expensive for her. "I'm so depressed," she says.

American Christmas shoppers in Paris aren't the only ones suffering from sticker shock. The dollar fell to a near-record low of $1.33 to the euro at the end of last week. It has shed about six cents since early November, shattering months of calm on currency markets, causing a mini-swoon on some stock exchanges and prompting French Finance Minister Thierry Breton to call for "great collective vigilance." The dollar has also slid against the British pound, which closed last week just a few cents short of $2, its highest in 14 years. Many investors are betting that the decline will continue. "The dollar has no friends in currency markets at the moment," says Neil Mackinnon, chief currency strategist for the British financial firm ECU Group.

Behind the abrupt movement is an important change of gear in the world economy. After four years of buoyant expansion, fueled in part by soaring house prices, the U.S. is now slowing. At the same time, Europe's economy is enjoying its strongest growth this decade, powered by a resurgent Germany. Growth rates on both sides of the Atlantic are expected to be somewhere between about 2-2.5% next year, according to various forecasts.

By comparison with recent years, those figures are measly for the U.S. — but unusually robust for the Europeans. Central banks on both sides of the Atlantic are reacting differently to the prospect. In Frankfurt, the European Central Bank is continuing to raise interest rates — the next hike is widely expected later this month. In Washington, meanwhile, the new Federal Reserve chairman, Ben Bernanke, has ended the series of rate increases introduced by his predecessor, Alan Greenspan, and Wall Street has been anticipating the start of a period of cuts as the U.S. economy loses momentum. This transatlantic divergence is pushing the dollar down. (Note, however, that Bernanke sounded a hawkish note in a speech last week, saying that inflation remained "uncomfortably high" — an indication that he won't be reducing rates soon.) The big question is whether the dollar will continue its decline over the next several months, or whether the recent fall is a temporary blip. A sustained, larger drop would make U.S. exports more competitive and help reduce America's yawning trade deficit — but it would also stir up inflation, as well as crimp the profits of European firms and hurt economic growth there. It also risks bringing heightened volatility to world financial markets. U.S. Treasury Secretary Henry Paulson, for one, thinks that's a bad idea. "A strong dollar is clearly in our nation's best interest," he said last week.

Despite some jitters, few are panicking yet. Jean-Michel Six, head of economic research at Standard & Poor's in London, reckons the dollar will fall to between $1.42 and $1.45 against the euro by mid-2007, but even at that level, "we do not expect any significant impact on overall growth" in Europe. German machinery companies are currently operating at over 90% of their potential capacity, the highest since 1990, and are thus well able to weather a weaker dollar, says Olaf Wortmann, an economist at the German Engineering Federation.

Some contend that the greenback may already have been oversold. Currency strategist Mackinnon says he urges caution when the market sentiment is all one way. And in New York City, Ken Goldstein, an economist at business research organization the Conference Board, reckons: "All we're seeing is another one of those short-term moves that will peter out in weeks or months."

The next clue about the dollar may come from Japan, where traders are now speculating on whether the Bank of Japan will raise rates later this month. The Japanese economy has been recovering from stagnation, and the bank in July ended its policy of keeping interest rates at zero. But rates remain very low — just 0.25% — and a hike could put further pressure on the dollar.

The present level is bad enough for Kathryn Wimmer, an apparel designer from Portland, Oregon, who was visiting a friend in Paris last week. "When I came here six years ago, things were a little expensive," she says. "Now you just watch the dollar going down every day. Pretty soon it's going to be hard just to come here." As for Christmas shopping in Europe, forget it. This year, Wimmer's only buying postcards.

• PETER GUMBEL | Paris
• A stalling U.S. economy means the dollar’s slide may not be over