Greenspan Talk Helps Lift Dollar

The weak dollar and fiscal discipline will eventually help bring down the massive U.S. trade and budget deficits, Federal Reserve Chairman Alan Greenspan said Friday in remarks that sparked a rally in the U.S. currency.

Meanwhile, a top Chinese banking official said his nation was not ready to let its currency rise, resisting pressure from U.S. and European officials who say that the artificially undervalued yuan gives Chinese exports an unfair advantage in global trade.

The statements by Greenspan and Chinese central bank Gov. Zhou Xiaochuan came as finance officials from the Group of 7 industrialized nations convened here for a two-day meeting, set to end today.

China is not a G-7 member but was invited to the proceedings in recognition of its growing economic clout.

G-7 members have urged the Bush administration to take more aggressive steps to lower its deficits, contending that they threaten global economic stability.

A weaker U.S. dollar should help reduce the trade deficit by raising prices of imports from countries whose currencies have been rising, thus reducing demand for them. But many foreign companies selling to Americans have kept prices down, even if it has meant lower profits.

That is now changing, Greenspan said.

Should the dollar decline further, foreign companies exporting to the U.S. “would no longer choose to absorb a further reduction in profit margins,” Greenspan said at a business conference here. At the same time, he said, “U.S. exporters’ profit margins appear to be increasing, which bodes well for future U.S. exports and the adjustment process.”

The dollar advanced to a three-month high against the euro in reaction to Greenspan’s remarks.

G-7 officials also are concerned about trade imbalances caused by the undervalued yuan. And John Taylor, U.S. Treasury undersecretary for international affairs, said Friday that China understood the need for it to move toward a system of flexible currency exchange rates and had indicated it was doing so but without specifying a timetable.

“We came away encouraged they recognized the importance of moving toward a flexible currency regime,” Taylor said after meetings with the Chinese officials.

But Chinese central banker Zhou officially remained noncommittal.

“We commit to the exchange rate at a reasonably balanced and stable level, and to work on achieving full convertibility of the yuan,” Zhou told reporters after meeting with Greenspan. “We are working hard in this direction, but it may take years to achieve the target.”

The yuan has been pegged at 8.3 to the dollar since 1994. Given the dollar’s weakness, the lower yuan has made Chinese products cheaper in foreign markets, a factor that has contributed to record U.S. trade deficits with the Asian nation.

However, many economists and investors predict that the Chinese will eventually let the yuan rise.

In other news from the G-7 meeting, Taylor rejected a British plan for an International Finance Facility that would double existing aid to poor nations by using rich countries’ guarantees to raise money in the capital markets.

“Not only does the IFF not work for the United States, we don’t need the IFF,” Taylor said as he arrived in London.

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Bloomberg News and Times wire services were used in compiling this report.