Federal Reserve Chairman Alan Greenspan told Congress Wednesday that the dollar's sharp decline on global currency markets was "unwelcome and troublesome," and blamed the problem in part on the federal government's huge budget deficit.
In his first public comment since the dollar began plummeting a week ago, Greenspan said that the sliding U.S. currency had the potential of increasing inflationary pressure on the U.S. economy."The weakness of the dollar against other major currencies is both unwelcome and troublesome," Greenspan told the House Budget Committee.
In his prepared remarks, Greenspan made no mention of the possibility that the Federal Reserve could be close to the end of its interest rate increases. Greenspan had hinted two weeks ago that the Fed not only could be through tightening interest rates, but could even ease credit conditions.
Those comments had been widely blamed as contributing to the dollar's plunge as global investors withdrew their funds from the United States, searching for better returns in Germany and other countries.
But Wednesday, Greenspan stressed that the economy was still vibrant and the Federal Reserve is on alert for any signs of inflation.
A top government priority should be trimming the deficit to convince financial markets the dollar's future is stable, he said.
"All told, a credible program of fiscal restraint that moves the government's finances to a sounder footing almost surely will find a favorable reception in financial markets," he said.
And, Greenspan said, strong financial markets will ease the impact of an economic slowdown from reduced federal spending.
"That market reaction, by itself, should serve as a source of stimulus that would help to offset in whole or in part the drag on spending that otherwise would be associated with reductions in federal outlays," he said.
The dollar hit record lows Wednesday against the Japanese yen and the German mark.
Two weeks ago, Greenspan hinted that the central bank's yearlong drive to boost interest rates was drawing to a close and that the Fed might actually reduce rates.
Analysts said that could have added to the dollar's downward momentum by convincing investors and speculators they could get a better rate of return elsewhere.
The dollar fell as low as 1.3600 marks in New York on Tuesday - below the previous low of 1.3870 set in September 1992 - before recovering in late trading to 1.3702. It also dropped at one point Tuesday to 89.05 yen before rising late in New York to 90.05 - still down sharply from 92.80 late Monday, the previous post-World War II low.
The seven increases in interest rates engineered by the Fed since February 1994 appear to be having the desired effect of slowing economic growth and holding inflation in check.
The latest sign the economy is easing was a Fed report Tuesday that consumer credit in January rose at an annual rate of 4.8 percent, the smallest increase in 20 months. A decline in borrowing for automobile buying helped hold down the increase, which was smaller than analysts had predicted.
"I think the message one should take away is not so much what the level of debt is but that the rate of increase is much slower and likely to continue to be much slower," said economist Michael Niemira of Mitsubishi Bank in New York City.