Greenspan warns of reduced appetite for dollar

Alan Greenspan, the chairman of the Federal Reserve, warned that investors would eventually lose their "appetite" for investing in the US economy.

Alan Greenspan, the chairman of the Federal Reserve, warned that investors would eventually lose their "appetite" for investing in the US economy.

His comment, which triggered a widespread fall in the dollar, came as the world's leading finance ministers gathered in Germany to discuss the threat posed by the global economic imbalances.

The meeting looks set for a weekend showdown as European finance ministers called for action to stem the dollar's fall while the US insisted the issue was not even up for debate.

In unusually frank comments Mr Greenspan said it was impossible to say what impact the US's record current account deficit would have on its currency. "It seems persuasive that, given the size of the deficit, a diminished appetite for adding to dollar balances must occur at some point," he said.

"International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the deficit and rendering it increasingly less tenable."

The dollar slumped to a four-year low against the Japanese yen and fell back through $1.30 against the euro.

Mark Austin, at HSBC, said: "I would almost describe this as Greenspan talks the dollar down." He said it was clear the US administration would not countenance a slowdown in growth as the way to resolve the current account deficit. "That puts the burden on the dollar, which is going down, he said.

WestLB, the German bank, said the overwhelming impact would fall on the euro as many of America's trading partners had fixed their currency to the dollar. It said the dollar would have to hit $1.64 to achieve a 10 per cent fall in the trade-weighted currency.

Michael Klawitter, an economist at the bank, warned "severe economic distress would follow". He added: "Our call for $1.40 reflects the expectation that central banks and politicians will take steps to stop the downward move before the danger becomes too great."

However there appeared to be little hope of any action at today's meeting of finance ministers from the Group of 20 countries, which includes Britain. John Snow, the US Treasury Secretary, said: "Exchange rates ... aren't on the agenda."

European politicians had attempted to apply pressure for co-ordinate intervention to halt the rise in the euro that threatens to bring their economy to a halt.

The UK Treasury declined to comment on the issue. It said Gordon Brown would use the G20 to push a plan to get the International Monetary Fund to assesspensions systems.