| Cymbal Man Freq. 2004-11-20, 11:06 am |
| Greenspan: Appetite for Dollar to Dwindle
53 minutes ago Business - Reuters
FRANKFURT (Reuters) - Insatiable foreign demand for dollar holdings will
eventually fall and help reduce the massive shortfall in the U.S. current
account as investors diversify, U.S. Federal Reserve (news - web sites) Chairman
Alan Greenspan (news - web sites) said on Friday in remarks that landed hard on
the dollar.
Greenspan told a banking conference the United States should help correct trade
imbalances by cutting its record budget deficit or face painful consequences.
"Current account deficits, even large ones, have been defused without
significant consequences, (but) we cannot become complacent," the Fed chairman
warned.
He was speaking ahead of weekend meetings in Berlin of the Group of 20 wealthy
and developing economies, which comes amid a tumble in the dollar that has
strained economic relations between the United States and Europe.
Greenspan said cutting the U.S. budget gap was the best way to boost domestic
saving and lessen America's reliance on foreigners to fund the huge shortfall in
the current account.
"U.S. policy initiatives can reinforce other factors in the global economy and
marketplace that foster external adjustment," the influential Fed chief said,
echoing growing calls from other Fed officials, European policy-makers and the
International Monetary Fund (news - web sites) for Washington to tighten its
fiscal belt.
"Alternative approaches to reducing our current account imbalance by reducing
domestic investment or inducing recession to suppress consumption obviously are
not constructive long-term proposals," he said.
The current account gap has ballooned to more than 5 percent of gross domestic
product, around a record $600 billion a year.
The Fed chief said an eventual desire by foreign investors to cut the risk of
holding too many dollars may lead them away from U.S. assets, unless offered
higher rates of return that would make the shortfall "increasingly less
tenable."
"We see only limited indications that the large U.S. current account deficit is
meeting financing resistance," Greenspan said. "Yet, net claims against
residents of the United States cannot continue to increase forever in
international portfolios at their recent pace."
"It seems persuasive that, given the size of the U.S. current account deficit, a
diminished appetite for adding to dollar balances must occur at some point,"
Greenspan said.
The dollar hit a new four-year low against the Japanese yen and fell against the
euro, pushing the European currency back toward recent record highs, as traders
saw these remarks as suggesting Fed acquiescence in the greenback's recent
decline.
WATERSHED
"It's a hell of a speech," said Jason Bonanca, director of foreign exchange
research at CSFB in New York. "It's remarkable ... I think what he's calling for
here is a weaker dollar, even though he's tightening," he said, referring to the
four interest-rate hikes the Fed has implemented so far this year.
"I think this is a watershed," he said.
U.S. Treasury Secretary John Snow made clear earlier this week the United States
would look coolly on any market interventions that sought to stem the
greenback's drop.
"I think the history of efforts to impose non-market valuations of currencies is
at best non-rewarding and checkered," Snow said in London on Wednesday.
Greenspan, on a panel with European Central Bank President Jean-Claude Trichet
and Bank of Japan Deputy Governor Kazumasa Iwata, said if cutting the U.S.
budget gap did not do enough to narrow the U.S. trade gap, the U.S. economy was
flexible enough that "market forces" could do the rest without a crisis.
As he has in the past, Greenspan said greater global flexibility could make
future current account adjustments less stressful and said both the United
States and Europe needed to do more to make their economies more resilient.
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