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Dollar Slide Halts as Greenspan Calls Plunge Troubling : Currency: Fed chief contends defeat of balanced-budget amendment sent wrong signal to global markets. He says Washington must cut deficit to ease pressure on greenback.

March 09, 1995|JAMES RISEN | TIMES STAFF WRITER

WASHINGTON — The U.S. dollar halted its four-day free fall Wednesday after Federal Reserve Board Chairman Alan Greenspan told Congress that the currency's sudden plunge was "unwelcome and troublesome"--testimony that traders and investors interpreted as a sign that the government would not tolerate the slide indefinitely.

In unusually candid testimony before the House Budget Committee, Greenspan also blamed last week's Senate defeat of the balanced-budget amendment for the sudden plunge in the value of the dollar and pointedly warned Congress that the currency will remain under long-term pressure until Washington tackles the deficit.

Greenspan provided fresh ammunition to Republican supporters of the amendment by saying that its defeat sent a signal to the international financial markets that Washington is still not serious about dealing with deficit spending.

Even though investors had suggested the defeat of the amendment was partly responsible for the dollar's sharp decline, Greenspan's remarks were extraordinary because he so rarely gets involved in political disputes over tax and budget policies, which are outside the jurisdiction of the Fed.

Greenspan's comments also highlighted the growing interdependence of global financial markets as his remarks immediately spurred a rebound in the dollar from its record lows against the Japanese yen and German mark. He cautioned that the sliding U.S. currency could increase inflationary pressures on the American economy.

The dollar rose to 1.3935 marks in New York trading, up from Tuesday's record low of 1.3702 marks. Against the yen, the dollar had started the day still in a free fall, declining to 88.75 yen in Tokyo, an all-time low, but it rose to 91.33 yen in late trading in New York. At its lowest, the dollar had fallen 8% against the mark since March 1 and 8.2% against the yen.

Greenspan also insisted that the dollar's decline has had little to do with the Administration's bailout of the Mexican economy, which he supported vigorously. U.S. intervention to prop up the Mexican peso, he said, has been far too small to have any significant impact on the dollar's value internationally.

His remarks had a major impact on the debate over key elements of the Republican "contract with America" on Capitol Hill, where GOP leaders are moving from the battle over the balanced-budget amendment into a fight over proposed tax cuts. The House leadership plans to unveil its package of tax cuts today.

Greenspan noted that he was not a supporter of the balanced-budget measure and said he believes that amending the Constitution is not the proper way to reduce the federal deficit. And he stressed that he believes Congress is more serious today about reducing spending than at any time "in the past 20 years."

Still, he said, financial markets interpreted the vote on the amendment as just one more sign of Washington's inability to confront the hard decisions necessary to put its fiscal house in order.

"I have not supported a balanced-budget amendment, so I'm not saying what should have been done (last week). . . . I'm saying that I was surprised how the markets responded to the defeat. I think that is a reflection of the concern about our willingness to pare the deficit."

On a day when Senate Republicans were meeting to determine whether to punish Senate Appropriations Committee Chairman Mark O. Hatfield (R-Ore.) for opposing the balanced-budget amendment, proponents of the measure responded to Greenspan's remarks by trying to draw him into the dispute.

"Have you said these things to Sen. Hatfield? Can we set up a meeting between the two of you?" asked Rep. Mike Parker (D-Miss.), a supporter of the balanced-budget amendment.

House Speaker Newt Gingrich (R-Ga.) also quickly agreed with Greenspan in laying blame for the dollar's crisis on the Senate vote. "The dollar has been sliding against the yen and the mark ever since the amendment went down," Gingrich said.

Greenspan said that defeat of the measure only increases the urgency for Congress to deal with deficit reduction and alter the long-term outlook for the American economy. "I think that if the (deficit) reduction is on a glide path (toward a balanced budget) and it is credible to the financial markets, I think we will see a marked reduction in long-term interest rates," Greenspan said.

But Greenspan also cautioned that Congress should avoid raising taxes to reduce the deficit, urging that virtually all of the reduction come through spending cuts.

"The rate of growth of government expenditures has exceeded the rate of growth of the tax base, so raising taxes to cover rising expenditures is simply not a policy choice we can use in the long run," he said.

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