Investors’ appetite for U.S. assets will eventually dwindle and the United States must reduce its budget deficit to prevent major economic damage, Federal Reserve Chairman Alan Greenspan said on Friday, in remarks that hit the dollar hard.

Speaking before meetings where financial policymakers may tackle the dollar’s tumble, Greenspan also said large scale intervention in foreign exchange rate markets to calm currency moves help somewhat, but did not have a lasting effect.

The clarity of these warnings surprised market analysts, even though Greenspan combined them with a call for the U.S. administration to tackle the huge budget and current account deficits that lie behind the dollar’s drop.

“We see only limited indications that the large U.S. current account deficit is meeting financing resistance. Yet, net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace,” Greenspan told a bankers’ conference in Frankfurt.

“It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point,” he said.

After his remarks the dollar slumped to a four and a half year low against the yen and nearly nine-year low against the Swiss franc. The euro was up 0.8 percent at $1.3055, within sight of its all-time peak around $1.3074.

Greenspan was speaking before finance ministers and central bank governors from the G20 group of rich and emerging market nations meet in Berlin at the weekend for their annual summit.

The dollar’s 30 percent tumble over the past few years has stirred concern that a dollar rout could destabilize the global economy. That drop has accelerated since the U.S. elections as worries mounted over financing the current account deficit which has ballooned to more than 5 percent of Gross Domestic Product.

Financial stability is on the agenda of the G20 meetings and would provide a forum for the major economies — United States, the euro zone, Japan and China — to hammer out any deal.

Currencies are not on the official agenda, though officials said they could be discussed on the sidelines.

Already the dollar’s drop is heightening risks for the euro zone’s economic recovery. But European Central Bank President Jean-Claude Trichet, speaking at the same session as Greenspan, steered clear of addressing the euro’s climb, only repeating his regular line that “brutal” foreign exchange rate moves are unwelcome.

Bank of Japan deputy governor Kazumasa Iwata made no reference to dollar movements.


Olivier Gasnier, analyst at Societe Generale in Paris, said Greenspan’s remarks contrasted with those of U.S. Treasury Secretary John Snow, who said that the United States would start narrowing its deficit and favors a strong dollar.

Gasnier said Greenspan’s message is that the U.S. will find it hard to fund the deficit and will have to raise interest rates to make U.S. assets more attractive.

“It’s remarkable. In the short term, I think what he (Greenspan) is calling for here is a weaker dollar,” said Jason Bonanca, foreign exchange director at CSFB in New York. “I think this is a watershed.”

Greenspan said cutting the U.S. budget gap was the best way to boost domestic savings and lessen America’s reliance on foreigners to fund the huge shortfall in the current account.

“U.S. policy initiatives can reinforce other factors in the global economy and marketplace that foster external adjustment,” the influential Fed chief said, echoing growing calls from other Fed officials, European policymakers and the International Monetary Fund for Washington to tighten its fiscal belt.

“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 U.S. assets, unless offered higher rates of return that would make the shortfall “increasingly less tenable.”

Snow made clear earlier this week the United States would look coolly on any market interventions that sought to stem the greenback’s drop. “I think the history of efforts to impose non-market valuations of currencies is at best non-rewarding and checkered,” Snow said in London on Wednesday.

Greenspan similarly said that results are mixed. “We do know that the very large interventions … do not create very large increases in exchange rates of a protracted nature. But clearly the impact is there.”