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Analysts understand Greenspan to want dollar weaker
By JEANNINE AVERSA
Associated Press Writer
Friday, November 19, 2004
WASHINGTON -- The persistence of bloated U.S. trade
deficits over time can pose a risk to the U.S.
economy, which thus far has proven resilient, Federal
Reserve Chairman Alan Greenspan warned Friday.
olicy-makers must not get lulled into a sense of
complacency, he said.
The broadest measure of trade, called the current
account deficit, swelled to an all-time high of
$166.2 billion in the second quarter of this year,
the most recent period for which this information
is available.
"Current account imbalances, per se, need not be
a problem, but cumulative deficits ... raise more
complex issues," Greenspan said in speech in
Frankfurt, Germany. A copy of his remarks was
distributed in Washington.
So far, foreigners are willing to lend the
United States money to finance the current
account imbalances, Greenspan pointed out.
The worry, however, is that at some point
foreigners might suddenly lose interest in
holding dollar-denominated investments.
That could cause foreigners to unload
investments in U.S. stocks and bonds,
sending their prices plunging and interest
rates soaring.
The sliding value of the U.S. dollar has
made some private economists more concerned
about this potential risk.
"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. "But when, through what channels, and
from what level of the dollar? Regrettably,
no answer to those questions is convincing,"
he said.
On Wall Street, stocks fell after Greenspan's
warning. The Dow Jones industrials were off
106 points in morning trading.
The U.S. dollar has been persistently weak
against the euro -- the currency used by 12
European countries. The dollar had dropped
to a new record low against the euro on
Thursday before bouncing back. The dollar
fell again after Greenspan's speech.
The dollar's slide has been good for U.S.
manufacturers because it makes their goods
less expensive in foreign markets. But the
corresponding rise of the euro makes
European goods more expensive in foreign
markets.
Greenspan, in his speech, did not
specifically discuss the value of the
dollar, although he said that forecasting
exchange rates "has a success rate no
better than that of forecasting the
outcome of a coin toss."
In his speech, Greenspan also didn't
discuss the future course of interest
rate policy in the United States.
Wanting to keep inflation from becoming
a danger to the economy, Fed policy-makers
last week boosted short-term interest
rates for a fourth time this year. The
action left a key rate, called the federal
funds rate, at 2 percent. The funds rate
is the Fed primary tool for influencing
economic activity.
With recent signs that inflation is
heating up again after a long cool spell,
economists believe the chances are
increasing that the Fed will raise rates
again at its last meeting of the year on
Dec. 14.
President Bush says the best ways to
handle the yawning trade deficits is to
get other countries to remove trading
barriers and open their markets to U.S.
companies. Democrats, including John
Kerry, Bush's former rival for the
presidency, have blamed Bush's
free-trade policies for the loss of U.S.
jobs.
Greenspan said that although there's
been evidence that "among developed
countries, current account deficits,
even large ones, have been diffused
without significant consequences, we
cannot become complacent."
Reducing the U.S. federal budget
deficit, Greenspan said, would be an
important action to boost U.S. savings.
Continued flexibility in the U.S.
economy also has been important in the
economy's ability to absorb and rebound
from economic shocks, he said.
In a question and answer period after
his speech, Greenspan said central bank
intervention in currency markets to
support the dollar -- such as through
buying dollars to drive up its exchange
rate -- could have only a limited and
short-term effect.
"Obviously we have looked at the issue
of the impact of monetary authority
intervention in the dollar for purposes
of sustaining exchange rates quite closely,
and our interest is obviously focused on
its impact on exchange rates and interest
rates," Greenspan said. "Our general
conclusion is that the impact has been
moderate, not especially large, but
clearly visible."
Treasury Secretary John Snow, in comments
earlier this week, appeared to rule out
intervention, saying markets must set
exchange rates. But private economists
have said that other countries might be
interested in taking action.
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