Federal Reserve chairman Mr Alan Greenspan said yesterday that the dollar's recent decline and the action of market forces should soon stabilise the US's yawning trade deficit.
Mr Greenspan was speaking in London ahead of the meeting of finance ministers and central bankers from the Group of Seven countries. He said market forces "appear poised to stabilise and over the longer run possibly to decrease the US current account deficit and its attendant financing requirements".
Mr Greenspan suggested that European companies may soon choose to defend their profit margins as the dollar weakens, rather than protect market share. He also held out the prospect of stricter budget discipline and a rise in household savings.
The relatively upbeat message was that the decline in the US currency to date should help to stabilise the current account deficit, the broadest measure of trade, which has grown to 6 per cent of US gross domestic product.
"The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume," the influential Fed chief said in an apparent nod to the Bush administration's pledges to hold down government spending.
The wide deficit has been a focus of discussions at the G7, because it would prompt a crisis if it occurred in an emerging market or another G7 member.
The dollar had fallen earlier in the day to a low of $1.3043 to the euro, compared with $1.2954 on Thursday, following a weaker-than-expected employment report, but Mr Greenspan's comment prompted a rally to $1.2872.
The G7 statement is expected to repeat its call for greater fiscal discipline in the US, stronger growth in Europe and more currency flexibility in Asia. China will be a guest at the gathering. Mr Zhou Xiaochuan, China's central bank governor, declined to comment on currency flexibility.
Mr Mervyn King, governor of the Bank of England, said the G7's discussion of currencies was best kept behind closed doors. But he said: "There is likely to be a limit to the amount of debt that one country can issue as a result of persistent deficits before investors start to worry about its ability or willingness to repay."
He added that when this country is the issuer of the global reserve currency, the "rapid build-up in the assets denominated in the reserve currency contributes to the potential instability of the international monetary system".
The dollar has lost almost 30 per cent against other major currencies since early 2002, but tensions within the G7 have settled in recent weeks as the US currency has stabilised.
Mr Jean-Claude Trichet, president of the European Central Bank, stressed the need for a global adjustment. Referring to the industrialised nations as a whole, he said: "We are structurally asking the rest of the world to finance us . . . It doesn't seem to me that this is an acceptable and sustainable long-term feature of the functioning of the global economy." - Financial Times Service.
