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Fed's Greenspan Says Dollar Safe if Trade Deficit Reduced

Fed Chairman Alan Greenspan said that the U.S. economy could withstand a reduction in the record-high trade deficit.

Compiled from Bloomberg and AP newswires, November 14, 2005

In a speech to the Banco de Mexico, Federal Reserve Chairman Alan Greenspan said that the record $668 bln U.S. trade deficit “cannot persist indefinitely,” and that at some point, “investors will balk at further financing.” He added however, that any impact of a trade deficit reduction, would be absorbed by the flexible U.S. economy. His remarks were delivered via video link to mark the Mexican Central Bank’s 80th anniversary.

Currently, the account deficit, financed by foreign investors, accounts for more than 6% of the total U.S. economy, measured by the gross domestic product. According to Fed chief Greenspan, the U.S. has been able to support the record account deficit in part because individuals, companies and governments are more willing to invest their money outside of their home markets. 

The impact of a pullback by investors remains to be seen. Whereas Greenspan suggests that the deficit will fall slowly and gradually, investors hint that it may fall more abruptly, possibly causing a sharp decline in the dollar or a spike in U.S. interest rates.

But, any change in the status of the dollar would be absorbed by the flexible U.S. economy, Greenspan argued.

``The flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years.''