Plans to balance US budget boost dollar

The dollar and US Treasury bonds rallied yesterday after the Clinton administration signalled that serious progress in cutting the enormous government budget deficit will be made this autumn, writes Diane Coyle.

Financial markets welcomed the White House announcement that the budget deficit will be significantly lower than expected and can be balanced in nine years, rather than 10. "America could be a low-deficit country by the 21st century," said David Hale, chief economist at the Kemper Financial Services investment group.

The administration said budget balance could be achieved in nine years. The Republican-dominated Congress has called for a seven-year deadline. Observers expect a compromise on eight years in the autumn.

Stuart Parkinson, US economist at Deutsche Morgan Grenfell, said: "The important thing for the markets is that a balanced budget bill will now be passed." He said this would strengthen the ailing currency and reduce long bond yields.

The White House said it expectd the government shortfall to be $160bn this financial year - $33bn below its original estimate. This is close to the $25bn which the independent Office of Management and Budget reckons can be trimmed from the total.

A senior White House economist, Martin Baily, said the administration expected the Federal Reserve would respond to success in trimming the budget by cutting short-term interest rates. "We certainly believe that monetary policy will respond and will help us to maintain a balanced growth path," he said.

However, the government's economic forecasts released yesterday were cautious in not projecting further interest rate reductions this year. The Federal Reserve lowered its key rate by 0.25 per cent on 6 July. Most Wall Street economists do not expect a further reduction at its policy meeting on 22 August.

The White House expects growth to revive in the second half of this year after a slowdown in the latest quarter.