WASHINGTON, May 1: Treasury Secretary Paul O’Neill said on Wednesday the US economy has fully recovered from last year’s downturn and fears that the US trade gap threatened global stability were overblown.

As he began testifying before the Senate Banking Committee, O’Neill flatly warned he wasn’t about to give currency speculators any “ammunition” by implying any change was forthcoming in the strong-dollar policy of the U.S.

His prepared testimony made no reference at all to currency policy and also struck a generally upbeat tone about world economic prospects.

O’Neill said only speculators benefit from swings in foreign-exchange values and “I don’t want to give them any ammunition to say that there’s a basis for roiling the world currency markets out of our conversation here this morning.”

The US Treasury chief played down charges a huge gap on the US current account — the broadest measure of trade — left the country vulnerable to a sudden reversal in fortune and said it reflected a productivity-driven US investment boom over the past decade.

“I am convinced that the United States has regained its economic footing,” O’Neill told the hearing, convened ostensibly to discuss a semiannual report from Treasury but that pitted opponents of a strong US dollar against O’Neill.

Manufacturers charge that the strength of the currency is costing Americans jobs because foreign producers are able to sell their goods more cheaply into US markets.

Jerry Jasinowski, president of the National Association of Manufacturers, told the committee there was no question the dollar was “overvalued” in relation to other leading world currencies. “This overvaluation is having a devastating effect on US manufacturing and on jobs,” he said.

Fred Bergsten, director of the Institute for International Economics — and like Jasinowski a long-time critic of dollar policy — similarly said in prepared remarks that the dollar was overvalued by as much as 20 per cent to 25 per cent.

O’Neill said fears about a threat from the current-account deficit “ignore forces that are working in the market.” The deficit has swelled to around 4 per cent of the value of the nation’s total economic output from about 1-1/2 per cent of gross domestic product in the mid-1990s.

“The current-account represents the gap between domestic savings and investment and has grown in the face of a productivity-fed US investment boom for the past decade,” O’Neill said.

“It is financed by international capital inflows that have risen over this period due to strong foreign interest in investing in the United States,” he added.

Capital inflows into the United States have remained strong even when economic activity slowed, interest rates fell and stock prices were down, O’Neill noted.

“This is a clear demonstration that foreigners regard investment in the United States as continuing to offer extremely attractive rates of return,” he said.

O’Neill added the money was coming to the United States because of the continuing long-term soundness of the US economy as well as the fact that its deep and stable financial markets made investing in America safe.

Speaking of global economic prospects, O’Neill said Europe also was recovering but its expansion was likely to lag the United States and to be slower paced.

Japan was still lagging, and despite efforts to increase liquidity was experiencing “entrenched” price deflation, O’Neill said. He said Japan, with the world’s second largest economy, must come to grips with its problems of massive bad bank loans and should deregulate industries to encourage greater price competition within its economy.

US Treasury Secretary Paul O’Neill on Wednesday pressed Japan and the eurozone to step up growth while brushing aside fears over the bulging US current account deficit.

“Restoring strong Japanese growth is one of the keys to unlocking strong global growth,” O’Neill told the Senate banking committee in prepared testimony.

The world’s second biggest economy was operating below its potential, he said.

Despite a “welcome and sharp expansion in the monetary aggregates ... deflation remains entrenched,” O’Neill said.

He stressed the importance for Japan “to increase price competition through deregulation and structural reform and to vigorously tackle its banking sector problems.”—Agencies