Greenspan sceptical about intervention: Euro's rise
FRANKFURT, Nov 19: US Federal Reserve Chairman Alan Greenspan deflated European hopes on Friday for coordinated central bank intervention to check the record-setting pace of the euro.
But Greenspan also issued a warning about the huge US current account deficit, voicing concern that foreign investors might become fed up with financing it. Speaking at a European banking congress here, the Fed chief said central bank intervention generally tended only to have a moderate impact.
"Large interventions ... do not create very large increases in exchange rates of a protracted nature," Greenspan said. He pointed to recent action by the Bank of Japan as an example, saying that the impact "has so far been moderate."
That was because of the "high level of sophistication of the markets," which tended to dilute the impact of any interventions, Greenspan explained. The euro's surge to more than $1.30 in recent days has led to calls in Europe for concrete action to stem the dollar's slide, which is hurting exports from the 12-country eurozone and threatens to put the brakes on economic growth in the region.
European Central Bank chief Jean-Claude Trichet, for one, told the same banking congress that he viewed the recent surge in the euro as "brutal". And German Finance Minister Hans Eichel said the United States, Europe and Japan should try and reach a common position on exchange rates.
But so far, US officials have remained deaf to such appeals. Asked whether there should be better coordination between three economic regions on the matter, Greenspan replied: "I don't think we have to do more. We're already doing as much as necessary."
Greenspan's comments came just as finance ministers and central bank chiefs from the world's 20 wealthiest nations were gathering in Berlin for a weekend of talks. While exchange rates were not officially on the agenda, they were nevertheless expected to figure prominently in the discussions.
Turning to the US current account deficit, which is one of the reasons behind the dollar's fall, Greenspan said he believed the shortfall could not be indefinitely supported by money from abroad. The US current account deficit reached a record $166.2 billion in the second quarter, with Japan and China the major buyers of US debt in recent years.
Greenspan, who has made repeated warnings that action will have to be taken to rein in the deficit, said current account imbalances were not an automatic problem. But he added that "cumulative deficits which result in a marked decline of a country's net international investment position - as is occurring in the United States - raise more complex issues."
Greenspan said that for the moment the United States was seeing only "limited indications" of foreign resistance to financing the deficit. "Yet net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace.
"Net debt service cost, though currently still modest, would eventually become burdensome," he said. Economists worry that foreigners could suddenly lose their appetite for dollar-denominated investments and unload investments in US shares and bonds. That would hit stock market confidence and send interest rates soaring, dampening growth and employment. -AFP
