Greenspan on Dollar Drop

Greenspan Says Dollar Drop May Reflect Falling U.S. Debt Demand

By Kevin Carmichael and Simon Kennedy

Oct. 22 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the dollar's decline may reflect a growing unwillingness among foreigners to buy U.S. securities.

``Obviously there is a limit to the extent that obligations to foreigners can reach,'' Greenspan said in a speech in Washington yesterday. The dollar's decline to its lowest since 1997 may be ``an indication America is approaching this limit.''

Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. stocks, bonds and other financial assets in August. Central banks and private funds are turning to currencies including the euro as financial markets outside the U.S. expand.

Total overseas holdings of U.S. equities, notes and bonds fell a net $69.3 billion in August after an increase of $19.2 billion in July.

The Fed's trade-weighted broad dollar index, a measure of the dollar against the currencies of U.S. trading partners, dropped to 99.49 on Oct. 19, the lowest level since 1997. The U.S. currency today fell to a record against the euro, trading at $1.4327 per euro at 10:15 a.m. in
Tokyo.

Greenspan first predicted that investors abroad would tire of financing the U.S. current-account deficit in a Nov. 19, 2004, speech in Frankfurt. ``A diminished appetite for adding to dollar balances must occur at some point,'' Greenspan said as Fed chairman at the European Banking Congress three years ago.

Slipping Share

Greenspan returned to that theme in a London speech in December 2005. After leaving the Fed, he told a conference in Tel Aviv in December that the dollar will ``continue to drift downward'' because it's unlikely that international investors will continue to increase their allocations to the U.S. currency.

The dollar's share of world foreign-exchange reserves has slipped as central banks sought alternatives to the currency in recent years. The dollar's proportion fell to 64.8 percent in June, from 71.8 percent seven years before, International Monetary Fund figures show. The euro jumped almost 8 percentage points, to 25.6 percent.

The liquidity and size of euro-denominated financial markets are approaching those of dollar markets, Bank of International Settlements economists Gabriele Galati and Philip Wooldridge wrote in a paper a year ago.

Ben S. Bernanke, Greenspan's successor, and Treasury Secretary Henry Paulson have repeatedly dismissed concern about international investors selling off their holdings of U.S. Treasury securities. Paulson noted in June that China's investments, the largest after Japan's, amount to about a day's worth of trading in the Treasury market.

`Waiting to Happen'

Greenspan also said yesterday that the August surge in the cost of credit following increased defaults on U.S. subprime mortgages was an "accident waiting to happen,'' given that investors were pricing risk too cheaply. "Something had to give,'' he said. "Had the crisis not been triggered by subprime mortgages it would have erupted in another sector or market.''

The former Fed chief said central banks increasingly appear to have ``lost control'' of market interest rates beyond three to five years of maturity. Before departing the central bank in January 2006, he said the lack of increase in long-term Treasury note yields during a period of rising Fed rates was a "conundrum.''

To contact the reporters on this story: Kevin Carmichael in Washington at kcarmichael@bloomberg.net

Last Updated: October 22, 2007 00:04 EDT