Mr Alan Greenspan, chairman of the US Federal Reserve, has issued a strong warning about the "increasingly less tenable" US current account deficit, triggering fresh falls in the dollar.
Speaking as finance ministers and central bank governors began gathering in Berlin for the G20 meeting of leading world economies, Mr Greenspan gave a broad hint that he expected the dollar to bear much of the brunt of adjusting a current account deficit in excess of 5 per cent of gross domestic product.
The Fed chairman suggested that international investors would "eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing of the US current account deficit and rendering it increasingly less tenable".
He also played down the effectiveness of financial intervention but made clear that world interest rates were on a clear upward trend. The dollar dropped to a four-and-a-half year low against the yen after Mr Greenspan's comments, while the euro surged close to its highs of earlier this week of more than $1.30. Gold prices rose to the highest level for 16 years.
Addressing a banking conference in Frankfurt, Mr Greenspan said there were "only limited indications that the large US current account deficit is meeting financing resistance. Yet, net claims against residents of the US cannot continue to increase forever in international portfolios at their recent pace".
Mr Greenspan favoured reducing the large US federal budget deficit to boost domestic savings. He said: "Alternative approaches to reducing our current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long-term solutions."
Highlighting the scale of the budget deficict, President George W. Bush yesterday signed into law an increase in the US government's debt limit to $8,180 billion (€6,288 billion) - a move needed to maintain the government's borrowing ability to finance continuing operations.
Congress voted late on Thursday to raise the debt limit by $800 billion, rejecting calls by some Democrats to accompany the vote with new restrictions designed to keep Congress from further increasing the deficit.
On the outlook for the dollar, Mr Greenspan said: "Forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss." - (Financial Times Service)
