February 4, 2005 11:02 AM
Greenspan Sees Weak Dollar Easing Current-Account Gap
Excerpt: A weaker dollar and greater fiscal discipline are among the factors that may help start to restrain the explosive U.S. current-account deficit, Federal Reserve Chairman Alan Greenspan said Friday at an economic conference in London.
A weaker dollar and greater fiscal discipline are among the factors that may help start to restrain the explosive U.S. current-account deficit, Federal Reserve Chairman Alan Greenspan said Friday at an economic conference in London.
But Mr. Greenspan cautioned that the global economy is essentially in uncharted waters given the unprecedented level of economic interaction between countries and thus any forecast of where the trade deficit is headed could prove to be wrong. "The dramatic advances over the past decade in virtually all measures of globalization have resulted in an international economic environment with little relevant historical precedent," he said.
The dollar's weakness against major rivals has helped boost exports and fattened U.S. exporters' profits, although, up to now, the "positive effect" of the dollar's decline on the trade gap has been offset by other factors, Mr. Greenspan said. That may soon change, he added.
"Besides market pressures -- which appear poised to stabilize and, over the longer run, possibly to decrease -- the U.S. current-account deficit and its attendant financing requirements, some forces in the domestic U.S. economy seem about to head in the same direction," Mr. Greenspan said in prepared remarks at the Advancing Enterprise 2005 Conference in London.
The weaker dollar may begin to help narrow the U.S. trade gap if foreign companies become less willing to take a hit on profits and start raising prices if the dollar falls further, Mr. Greenspan said. "[W]e may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins."
Gains from increased currency hedging against the dollar since early 2002 may have helped European exporters to tolerate a fall in operating profit margins "beyond what they otherwise would have been able to tolerate," he said. "Hedging, however, can only partially and temporarily alter the impact of exchange rates on export prices," he said. "Successful currency hedges can at best delay but cannot prevent the ultimate effects of exchange rates on trade."
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