Greenspan warning on US economic outlook

 

US Federal Reserve chairman Mr Alan Greenspan gave a sombre warning yesterday that the outlook for the US economy had deteriorated significantly as a result of global financial turmoil.

The Fed chairman's remarks, which hinted at further cuts in interest rates by the central bank over the next few months, came as the dollar plummeted on foreign exchange markets.

The dollar lost an unprecedented 10 yen in one day's trading yesterday as investors reacted to news of a possible breakthrough in the Japanese government's efforts to resolve the country's banking crisis.

The dollar/yen fall caught the market off guard, since many thought Japanese financial institutions would start buying dollars in October, the start of the new fiscal half-year, for balance-sheet reasons.

Japanese companies repatriate their overseas funds at each half-year book closing and re-invest them abroad later in search of higher yields.

Mr Greenspan's comments also pushed the dollar lower as markets anticipated lower US interest rates.

In his remarks to an economists' group in Washington, Mr Greenspan said he had never seen anything quite like the events unfolding in the financial markets.

Hopes that Asian "contagion" had moved into remission had proved wrong. The main threat to the US economy stemmed from the financial sector, he told the National Association for Business Economics.

In the last two months there had been a large and sudden shift in investor sentiment away from risk in a way that seemed certain to damp economic growth substantially next year.

"We are clearly facing a set of forces that should be dampening demand going forward to an unknown extent . . . This is a time for monetary policy to be especially alert," he said. Stock prices initially surged on the Fed chairman's warnings. But as investors digested the full message, with its unusually gloomy prognosis, equities gave up most of their early gains.

The Dow Jones ended off 1.29 points, or 0.02 per cent, at 7,741.69 after an early rally of more than 100 points.

European stocks reacted badly to the dollar's decline which also saw the US currency hit a 20 month low against the deutsch mark.

The DAX fell 2.9 per cent to close down 121.23 at 4064.16 while the broad Eurotop 300 index dropped 1.5 per cent.

Dublin made early gains yesterday, but it was also unable to hold them, falling back in afternoon trading to close at 3924.68, down 8.75 points.