Federal Reserve Chairman Alan Greenspan said Tuesday that a weaker U.S. dollar will help narrow the nation's trade gap. Correspondent Jenny Falcon reports from New York.
Mr. Greenspan said the value of the U.S. dollar compared with the currencies of major U.S. trading partners has dropped 12 percent since its peak in 2002. He says that the weaker dollar has made U.S. goods more affordable for foreign markets. At the same time, it has also made foreign products more expensive for U.S. buyers.
Mr. Greenspan said the declining dollar should eventually curb the U.S. trade deficit.
"The currency depreciation that we have experienced of late should eventually help to contain our current account deficit as foreign producers export less to the United States," he said. "On the other side of the ledger, the current account should improve as U.S. firms find the export market more receptive. But in the process, dollar prices of imports will surely rise."
The Federal Reserve Board chairman also warned that protectionism - the effort to protect domestic producers by placing quotas or high tariffs on foreign imports - could damage the global economy's flexibility.
"The costs of any new such protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy," he said. Consequently, it is imperative that creeping protectionism be thwarted and reversed."
Mr. Greenspan made his remarks in a speech to high-level members of the finance community at the Economic Club of New York.
Mr. Greenspan assured the financiers that the ability of the U.S. economy to withstand severe shocks since mid-2000, including the September 11, 2001 terrorist attacks, illustrates the U.S. economy's increased flexibility.