Greenspan stays calm over massive US trade deficit

Federal Reserve chairman Mr Alan Greenspan yesterday appeared calm about the massive US trade deficit, saying it should cause neither financing problems nor inflation from a falling dollar.

"There is, for the moment, little evidence of stress in funding the US current account deficits," Mr Greenspan said.

Mr Greenspan, addressing a Bundesbank seminar, also warned against stepping into markets to correct imbalances. He said markets could adjust for the US trade deficit with no other actions being taken.

By taking this free-market approach, Mr Greenspan offered no solace to European leaders, who yesterday heightened their pressure on top financial policymakers to halt the dollar's fast decline for fear that it could upset economic recovery.

It is understood that German Chancellor Gerhard Schröder told Mr Greenspan at a meeting earlier in the day that dollar strength was a concern.

Analysts said the absence of any comment from Mr Greenspan that the US trade deficit or fast-moving currencies - the dollar has fallen about 18 per cent in the past year - were destabilising influences leaves Europe alone on the issue.

This would make it far harder for finance ministers and central bankers at the Group of Seven meeting of top industrial nations in early February to reach agreement to halt the dollar's slide against the euro, analysts said.

Financial markets showed little reaction to Mr Greenspan's comments. The euro remained largely within its trading range for the day against the dollar at $1.2748.

Mr Greenspan acknowledged in his speech that euro-zone exporters were under "considerable pressure", but he also noted that financial conditions were improving in credit and stock markets.

While the dollar had fallen broadly against other currencies, he said: "Inflation, the typical symptom of a weak currency, appears quiescent."

Asked what the risks were of a dollar crisis, Mr Greenspan said he was hopeful that in a globalised financial system, the large US current account deficit could be managed; and in a lengthy economic discussion, he consistently stressed the importance of flexible and open markets.

He also said he sees a global crisis as "extraordinarily unlikely". "If no measures are taken to adjust the current account deficit, the market will do it," he said.

"However, we should be very careful in trying to alter the market's driving towards balance, because with the major changes that are going on internationally, not all of which we understand, there are risks that unexpected events can occur."

The US current account deficit in the third quarter last year was $135.04 billion.

Mr Greenspan said if it kept widening, at some point foreign investors' appetite for financing US debts would shrink, but it was hard to gauge when that would occur.  - (Financial Times Service)