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11/19/2004:

"Greenspan does down the dollar"

Alan Greenspan, Federal Reserve chairman, yesterday gave the dollar a further push lower as he said the huge US current account deficit threatened to scare off foreign investors.

His comments followed remarks from the US treasury secretary, John Snow, this week that poured cold water on the idea of intervention to support the greenback.

Mr Greenspan sent jitters through the currency markets as traders awaited the outcome of a meeting of the Group of 20 industrialised and developing countries this weekend in Berlin.

His remarks lent weight to a growing conviction that the American authorities are happy to see the dollar slide, making exports cheaper and imports dearer and thereby helping to correct the current account deficit.

In European markets the euro rose to $1.3068, just shy of the all-time high that it hit earlier in the week, while the dollar fell to a new four-year low against the Japanese yen of below ¥103.

"Given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Mr Greenspan told a banking conference 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 US current account deficit and rendering it increasingly less tenable."

The deficit has ballooned to more than 5% of gross domestic product, or $166bn (£90bn) in the second quarter of the year, driven by Americans' appetite for imports and flows of money into US financial assets, particularly bonds.

The dollar has been sliding against other major currencies for a couple of years but its fall has accelerated since the re-election of President Bush this month as markets refocused on the current account and budget deficits. The large tax cuts of Mr Bush's first term have driven the government's budget deficit to record levels.

The US deficit is mainly being financed by a huge surplus in China, which artificially pegs its currency at a low rate against the dollar to boost its exports. The Chinese authorities use their export earnings to buy dollar assets, but there are reports that they are losing their appetite for US holdings, which may be what Mr Greenspan was referring to.
Full Article:guardian.co.uk