Europe's manufacturing base is suffering from the strong euro

The investment at the Spartanburg plant, South Carolina, is aimed at increasing capacity from 160,000 to 240,000 units by 2012.

The move is set to create 500 new jobs and comes after the firm recently said it would cut 7.5% of its German workforce in 2008.

The firm is facing both rising costs in Europe as well as slowing US demand.

Since last September, the dollar has tumbled against the euro, hurting firms that pay their costs in euros but receive payment in dollars.

The euro touched an all-time high of $1.546 last week after punching through the $1.50 level at the end of February.

BMW is not the only European firm affected by the swings in exchange rates.

In December last year, the head of the European aerospace and defence company EADS, Louis Gallois, gave a strong indication that if the situation persisted, some of the manufacturing of the Airbus passenger jet would have to be moved outside Europe.

Changing gear

"The boost in production capacity will positively impact the logistics, suppliers, and distribution networks that support the manufacturing process," said Josef Kerscher, president of BMW Manufacturing.

The firm said the plant would produce the BMW X3, X5 and X6 models for international markets.

Analysts say that by building more vehicles in its South Carolina plants, Munich-based BMW can pay less wages in euros and will also save money by sourcing locally for parts used by its US factories.

This shift in production has resulted in planned cuts of 8,100 positions in Germany.

"This is completely driven by the plunge in the dollar," said Oliver Wyman, publisher of the Harbour Report on automotive manufacturing activity.

"Conceivably, as the volume increases and the manufacturing system at the Spartanburg, South Carolina, plant improves, costs may come down enough to cut prices of their cars."