Dollar Falls After Greenspan Says He Expects Further Decline

Dollar Falls After Greenspan Says He Expects Further Decline
By Min Zeng

Dec. 11 (Bloomberg) -- The dollar fell the most in a week against the euro after former Federal Reserve Chairman Alan Greenspan said the U.S. currency will probably keep dropping until the nation's current-account deficit shrinks.

The U.S. currency fell in three of the past four years. It has lost 10.5 percent this year versus the euro as investors bet the European Central Bank would lift interest rates more than the Fed. It's ``imprudent'' for investors to keep their holdings in one currency, Greenspan said.

``The dollar is heading where the current account deficit goes,'' said Tim Mazanec, a senior currency strategist at Investors Bank & Trust Co. in Boston. ``A widening deficit will cause the U.S. more pain.''

The U.S. currency weakened to $1.3239 per euro at 4:07 p.m. in New York from $1.3203 on Dec. 8. The dollar fell to a 20- month low of $1.3367 per euro this month. The U.S. currency pared some of an earlier gain, trading at 116.97 yen from 116.33 on Dec. 8.

The yen dropped to a record low of 154.87 per euro earlier today after a Bank of Japan official told Jiji Press the central bank probably wouldn't raise interest rates next week.

``I expect that the dollar will continue to drift downward until there is a change in the U.S. current account balance,'' Greenspan said, speaking from Washington by satellite to a business conference in Tel Aviv. ``It's imprudent to hold everything in one currency.''

Trade Shortfall

A bigger shortfall in the U.S. current account, the broadest measure of trade, means more dollars need to be converted into other currencies to pay for imports. The U.S. current-account deficit was $218.4 billion in the second quarter, the second-biggest on record.

``You have a former Fed chairman talking about dollar weakness,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The market is still trapped in a negative dollar sentiment, especially against the euro.''

Losses in the dollar were limited as investors speculated the Fed will keep rates unchanged at a meeting tomorrow and suggest inflation remains a risk. Traders pared bets the Fed will cut rates next quarter following a U.S. Labor Department report on Dec. 8 showing job growth accelerated in November.

The Fed will keep the benchmark overnight lending rate between banks at 5.25 percent for a fourth straight meeting, according to the median estimate in a survey by Bloomberg News. The Bank of Japan's rate is 0.25 percent while the European Central Bank's benchmark is 3.5 percent.

`Inflation Risks'

``Some inflation risks remain,'' the Fed said in a statement after its previous rate decision, on Oct. 25. ``We cannot let up our guard on inflation,'' Fed Bank of Chicago President Michael Moskow said last week in an interview broadcast on CNBC.com.

The personal consumption expenditures price index, minus food and energy, rose 2.4 percent for the year ending October, the 31st month at or above the top of the ``comfort'' range of 1 percent to 2 percent indicated by Fed Chairman Ben S. Bernanke.

Fed funds futures indicate traders see about a 28 percent probability the central bank will reduce rates to 5 percent before April, down from about 100 percent before the labor report.

``I wouldn't go against the Fed right now,'' said Greg Schwake, head of foreign exchange trading at Fortis Financial Services LLC in New York. ``The Fed has been transparent that they are still worried about upside risks in inflation. The sentiment favors the dollar.''

66 Percent

The dollar gained the most in two months against the yen and rebounded from near a 20-month low versus the euro on Dec. 8 as the Labor Department data showed the U.S. added 132,000 new jobs in November after a revised gain of 79,000 a month earlier. The median forecast in a Bloomberg News survey was for 100,000 jobs.

The dollar accounted for about 66 percent of central banks' currency reserves by March, according to the Bank for International Settlements, down from around 70 percent in 2001.
Russia and other oil-producing countries shifted assets away from the dollar and into the euro and yen in the second quarter, the BIS said in its quarterly review.

Russia and members of the Organization of Petroleum Exporting Countries reduced dollar holdings to a two-year low of 65 percent of the total, from 67 percent in the first quarter, the Basel, Switzerland-based bank said in a report on its Web site.

``People are concerned about diversification away from the dollar, especially people at central banks who make long-term decisions about foreign-exchange reserves,'' said Lu Xinyi, chief strategist in Tokyo at Mizuho Corporate Bank Ltd. ``The whole concept implies dollar selling'' against the euro.