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Greenspan Says Dollar Drop Not Hurting Economic Recovery
By Joseph Rebello
WASHINGTON -- Federal Reserve Chairman Alan Greenspan
said Tuesday the dollar's steep decline against the European common currency has created a headache for European exporters, but it isn't fanning inflation in the U.S. or imperiling the global economic recovery.
In prepared remarks to a group of central bankers and economists in Berlin, Mr. Greenspan mostly repeated the views he expressed in a speech in Washington two months ago, when he asserted that the dollar's decline against other major currencies had created no "measurable disruption" in the flow of international finance. But the latest speech contained a caveat: "Certainly, euro-area exporters have been under considerable pressure."
Over the last two years, the dollar has declined nearly 30% against the euro, fanning worries among European economic policy makers that an ascendant euro could slow the region's economic recovery. On Monday, for example, European Central Bank President Jean-Claude Trichet suggested that the movement had been "brutal" and indicative of "excessive volatility."
But Mr. Greenspan, speaking at a lecture organized by the German central bank, said the dollar's decline hasn't yet threatened the global economic recovery. Despite the harm to European exporters, he said, interest rates on corporate bonds in recent months have signaled a diminished perception of risk and "equity prices have risen, throughout much of the global economy." He didn't discuss the near-term outlook for U.S. monetary policy.
Mr. Greenspan stuck to his assessment -- first delivered at a speech at the Cato Institute in November -- that U.S. inflation "appears quiescent" despite the dollar's decline against other major currencies. On Tuesday, the government released new evidence of that -- import prices grew a scant 0.2% in December, less than half the rate in November, the Labor Department said. Fed policy makers have said that with inflation low and likely to remain so, they can hold interest rates steady for a "considerable period."
Mr. Greenspan also said the widening U.S. current-account gap -- now equal to more than 5% of the gross domestic product -- hasn't posed a problem for the economy. "To date, the widening to record levels of the U.S. ratio of current- account-deficit to GDP has been, with the exception of the dollar's exchange rate, seemingly uneventful," he said.
Foreign investors, he said, have remained more than willing to finance the growing deficits. "There is, for the moment, little evidence of stress in funding U.S. current-account deficits," he said. He acknowledged the deficits can't expand indefinitely without frightening such investors. But increasing the flexibility and sophistication of global financial markets will help stave off a crisis, he said.
"We may not be able to usefully determine at what point foreign accumulation of net claims on the United States will slow or even reverse," Mr. Greenspan said. "But it is evident that the greater the degree of international flexibility, the less the risk of a crisis."
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