The insatiable foreign demand for dollar holdings will eventually fall as investors diversify, US Federal Reserve Chairman Mr Alan Greenspan said today in remarks that landed hard on the dollar.
Mr Greenspan told a banking conference in Frankfurt the United States should cut its record budget gap to help narrow the shortfall in its current account and avoid a need to offer higher rates of return to retain foreign investment and painful economic consequences.
"Current account deficits, even large ones, have been defused without significant consequences, (but) we cannot become complacent," Mr Greenspan warned.
He was speaking ahead of weekend meetings in Berlin of the Group of 20 wealthy and developing economies, at which the tumbling dollar will likely be a topic for discussion.
Mr Greenspan said cutting the US budget gap would be the best way to boost domestic saving and lessen America's reliance on foreigners to fund the huge shortfall in the current account, a broad trade measure that includes investment flows.
"Alternative approaches to reducing our current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long-term proposals," he said.
The Fed chief said an eventual desire by foreign investors to cut the risk of holding too many dollars may lead them away from US assets or lead them to seek higher rates of return. He warned this would elevate the cost of financing of the US current account deficit and render it "increasingly less tenable."
The dollar hit a new four-year low against the Japanese yen after his comments and fell against the euro, pushing the European currency back toward recent record highs.