Greenspan sees trade deficit curb
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Less currency intervention by Japan and China would help the U.S., Greenspan says.
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WASHINGTON (Reuters) -- U.S. Federal Reserve Chairman Alan Greenspan says a declining dollar will help curb America's huge trade deficit but suggests it could happen sooner if Japan and China's currency interventions were smaller.
Greenspan also said that while U.S. interest rates have been very low for some time, they'll have to rise eventually.
"The currency depreciation that we have experienced of late should eventually help to contain our current account deficit as foreign producers export less to the United States," the Fed chief told the Economic Club of New York Tuesday.
Greenspan noted overseas claims on the United States -- represented by the U.S. current account imbalance -- have grown markedly and that it was hard to say when that will slow or even reverse, "but it is evident that the greater the degree of international flexibility, the less risk of a crisis."
He said the U.S. economy has demonstrated its increased flexibility by weathering a series of severe shocks since mid-2000 and posted only a small drop in national economic output.
In a wide-ranging address, Greenspan said he did not believe heavy currency intervention by Asian countries, including Japan and China, was driving the value of the euro up against the dollar, notwithstanding European nations' complaints that that was happening, and threatening their economic recovery.
"But a more likely possibility is that Asian currency intervention has had little effect on other currencies and that the trade-weighted average of the dollar is, thus, somewhat elevated relative to the rate that would have prevailed without intervention," Greenspan said, implying the dollar might have fallen more swiftly and thus slowed imports.
In early New York trading Tuesday, the dollar turned sharply higher against the euro and the yen, aided by a manufacturing report Monday that stoked speculation a forthcoming U.S. jobs report would show solid improvement.
On interest rates, Greenspan said: "The federal funds rate is accommodative and at some point it will have to rise back to a more neutral state, because it is inconsistent with general long-term stability.
"This is a very special case that we are dealing with," he added, since the fed funds rate -- the Fed's target rate for overnight loans between banks, is at 1 percent, the lowest in more than 40 years.
Analysts expect the central bank to start tightening policy at some point this year as the economic recovery strengthens.
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Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
