Greenspan says U.S. can’t be ‘complacent’ on deficits

Craig Torres

Friday, Nov. 19, 2004 | 9:18 a.m.

Foreign investors will reach a limit in their desire to finance America's current account deficit and eventually diversify into other currencies or demand higher U.S. interest rates, Federal Reserve Chairman Alan Greenspan said today. The dollar extended declines against the euro and yen.

"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 at the European Banking Congress in Frankfurt. "International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit and rendering it increasingly less tenable."

The Fed chairman repeated his view that financial markets will most likely absorb this adjustment without high costs to the U.S. economy. "Market forces should over time restore, without crises, a sustainable U.S. balance of payments," Greenspan said. Even so, "we cannot become complacent."

Against the yen, the dollar fell to 103.23 at 9:18 a.m. in New York, from 104.18 late Thursday, according to electronic currency dealing system EBS. It fell as low as 103.17, the weakest since April 2000. The U.S. currency also declined to $1.3027 per euro from $1.2961. The dollar has dropped to five records against the euro in two weeks.

"It's suggesting there's not going to be any change in policy, at least encouraged by Chairman Greenspan," said Michael Woolfolk, a currency strategist in New York at Bank of New York. While the U.S. says it supports a strong dollar, there is "a lack of desire to back it up."

Predicting the dollar's level is difficult, Greenspan said. "Forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss," the Fed chairman said at the panel, which included European Central Bank President Jean-Claude Trichet and Bank of Japan Deputy Governor Kazumasa Iwata.

Greenspan is likely not expecting a dollar crisis, said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York.

"I would realistically say that this isn't high up on the list of Fed worries," Rupkey said. "All the dollar crises in the '80s were accompanied by the other financial markets going haywire. If this is a looming crisis, somebody better wake up and tell the stock market."

Greenspan and U.S. Treasury Secretary John Snow are participating in meetings of the Group of 20 finance ministers and central bankers over the weekend. The dollar's slide against the euro is likely to dominate policy maker's discussions, analysts said. Greenspan didn't speak about the direction of interest rates or the pace of U.S. economic growth in the text of his remarks to a Frankfurt panel on the euro.

The U.S. current account deficit, the widest measure of trade because it includes investment, grew to a record $166.2 billion in the second quarter. The federal government's deficit was $412 billion in the fiscal year ended Sept. 30, also a record. The Fed chairman said one key to the U.S. trade adjustment would be policies that boost U.S. saving.

"Reducing the federal budget deficit (or preferably moving it to surplus) appears to be the most effective action that could be taken to augment domestic saving," Greenspan said. "Significantly increasing private saving in the United States -- more particularly, finding polices that would elevate the personal saving rate from is current extraordinary low level -- of course would be helpful."

Snow signaled two days ago that the Bush administration won't participate in attempts to stop the dollar's slide. "The history of efforts to impose non-market valuations on currencies is at best unrewarding and checkered," Snow said at a conference in London.

Fed officials received a special presentation from the staff on the U.S. current account deficit and June, and subsequently began remarking on the dollar's potential to fall.

"What corresponds to those deficits is the need to borrow from the rest of the world," San Francisco Fed bank president Janet Yellen said Sept. 9. "Ultimately escalating borrowing leads to, over a matter of decades, as unsustainable a trend as federal deficits, and somewhere that has to turn around, and I believe that involves the dollar."