msnbc.com staff and news service reports
updated 11/19/2004 5:00:35 PM ET 2004-11-19T22:00:35

The U.S. dollar extended its recent slide Friday, sinking to its lowest level in more than four years against the Japanese yen and flirting with a record low against the euro after U.S. Federal Reserve Chairman Alan Greenspan warned of the dangers of America's growing trade deficit.

Speaking at a banking conference in Frankfurt, Greenspan warned that the persistence of bloated U.S. trade deficits over time can pose a risk to the U.S. economy, which thus far has proven resilient, and said U.S. policy-makers should not be complacent.

The broadest measure of trade, the current account deficit swelled to an all-time high of $166.2 billion in the second quarter of 2004, and to date foreigners have been willing to lend the United States money to finance its current account imbalances, Greenspan said.

But economists are worried that at some point a declining dollar could mean foreign investors suddenly lose interest in holding dollar-denominated investments, and that could lead them to unload their investments in U.S. stocks and bonds, sending their prices plunging and U.S. interest rates soaring.

Indeed, Greenspan’s comments weighed heavily on U.S. stock prices Friday, reflecting mounting concern on Wall Street that a much steeper decline in the price of the dollar may force the Fed to be more aggressive in raising interest rates, which in turn could damage economic growth and U.S. corporate profits.

Greenspan didn’t specifically mention the U.S. dollar in his remarks Friday, instead recommending a cut in the U.S. budget deficit.

But analysts are all too aware that, politically, the easiest way to correct a trade shortfall is through a weaker currency, and many on Wall Street were reading between the lines of the Fed chief’s comments and interpreting a tacit approval for a weaker dollar.

Peter Cardillo, chief strategist at New York retail brokerage S.W. Bach, said currency traders used Greenspan’s remarks on the trade deficit as an excuse to sell more dollars. “Greenspan is basically sending a message to the market that he is not really that concerned about the weaker dollar, and that’s fuelling more selling,” he said.

No U.S. dollar intervention
U.S. policy-makers look unlikely to step in to counter the dollar’s decline. On Thursday, U.S. Treasury Secretary John Snow reiterated the Bush Administration’s strong dollar policy, a stance that economists say shows Washington is unlikely to intervene.

The U.S. currency’s downward turn over the last few months has raised concerns about its impact on the global economy, although in the United States its relatively orderly decline is seen as mostly beneficial for the U.S. economy and businesses.

But the weaker dollar has pushed up the price of the euro currency and fueled speculation that the European Central Bank may stage a risky intervention to prop up the swooning greenback and protect Europe’s export-driven economic recovery. A stronger euro increases the cost of euro zone exports, which account for about one-fifth of the euro region's economy.

While a weaker dollar raises the cost of goods imported into the United States, it makes U.S. goods cheaper abroad, potentially benefiting U.S. businesses and fueling U.S. economic growth. Economists have also said it is likely to help to narrow the nation's massive trade gap with the rest of the world.

A weaker dollar hurts American consumers when they travel overseas, as it reduces the value of their currency. At home, it is likely to compel U.S. consumers to buy more domestic goods over foreign-made goods, which are likely to become more expensive analysts said.

The euro rose to $1.3068 against the U.S. dollar soon after Greenspan’s comments were reported early Friday, just missing its all time high of $1.3074 reached on Thursday, only to retreat slightly. Meanwhile, the dollar fell to 102.76 yen, down from 104.20 yen late Thursday and below the four-and-one-half year low of 103.65 yen set Thursday.

The dollar is likely to be a hot topic at the Group of 20 meeting this weekend and dealers doubt there will be any agreement on controlling currencies.

MSNBC.com's Roland Jones, Reuters and the Associated Press contributed to this report.

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