The "awesome" scale of Japan's accumulation of dollar reserves could become "problematic" for the Japanese economy, Mr Alan Greenspan, chairman of the Federal Reserve, said last night.
"It must be presumed that the rate of accumulation of dollar assets by the Japanese government will have to slow at some point and eventually cease," he said in a speech in New York.
Mr Greenspan acknowledged that intervention was partly an anti-deflationary policy for Japan. "In time, however, as the present deflationary situation abates, the monetary consequences of continued intervention could become problematic," he said.
However, a drop in the level of official dollar-buying from Asia would not necessarily cause an automatic dollar fall. Mr Greenspan said the dollar's recent decline would help curb US trade and current account deficits without massive disruption to financial markets. But his speech to the Economic Club of New York played down market concerns about the danger of a broad dollar collapse.
The dollar rose to its highest in four months against the yen yesterday as investors continued to close their long-held bets on the dollar's weakness. It also rose against sterling and the euro.
The dollar's rise was assisted by some speculation that the European Central Bank could cut interest rates at its meeting tomorrow.
Most analysts see this as unlikely, but yesterday Ms Christa Randzio-Plath, chair of the European Parliament's Committee on Economic and Monetary Affairs, called for such a cut.
Gains against the yen sparked a wide rally for the greenback yesterday The euro slid more than 2 cents to $1.2202, its weakest in more than two months, while sterling tumbled nearly 4 cents to $1.8356. The dollar's strength helped lift Asian equity markets. - (Financial Times Service)
