Federal Reserve Chairman Alan Greenspan said last week that a weak dollar was not causing inflation but could help the US current account deficit, remarks traders said was a “green light” to sell the currency.
“To date, we have seen very little effect of the decline of the dollar on American inflation. If it should continue, however, then we would begin to see some rise in import prices and because of that some impact on overall American inflation,” he said during his semi-annual testimony to Congress.
“But even under those conditions, the numbers look really quite small. And as a consequence, it’s not something which we think is something that gives us considerable concern at this point,” he told the House of Representatives Financial Services Committee.
Greenspan’s comments put the dollar on the defensive for the first time since a Group of Seven meeting in Florida on Feb. 7 warned against excessive currency volatility.
“It seemed that he was falling into line with US Treasury Secretary Snow as viewing the dollar’s decline as orderly and benign,” said Michael Woolfolk, senior currency strategist, Bank of New York.
“That (means it) will be seen by traders as a green light to sell the US dollar from both the Fed and the Treasury’s point of view,” Woolfolk said.
The dollar has slipped 13% against a broad basket of currencies since early 2002 without official US complaint, convincing markets the United States was happy for a weaker dollar to boost exports.
The G7 gave financial markets grounds to doubt this analysis, but Greenspan’s testimony has revived suspicions.
“The currency depreciation we have experienced of late should eventually help contain our current account deficit as foreign producers export less to the United States,” he said in earlier testimony.
“On the other side of the ledger, the current account should improve as US firms find the export market more receptive,” he added.
One of the reasons the impact of the dollar’s slide on inflation had been mute was that foreign exporters were using hedging to protect their profit margins and so were not passing on higher prices to the US, Greenspan said.
But this cannot continue indefinitely, he added, because hedging is expensive. (Reuters)