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Greenspan: Defeat Caused Decline Plunge In Dollar’s Value Due To Amendment’s Failure, He Says

Federal Reserve Board Chairman Alan Greenspan Wednesday 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 pressure until Washington tackles the deficit.

In unusually candid testimony before the House Budget Committee, Greenspan provided fresh ammunition to Republican supporters of the balanced budget amendment by saying the dollar’s decline coincided with the Senate’s vote, and that the defeat sent a signal to the international financial markets that Washington is still not serious about dealing with deficit spending.

Greenspan also said the decline of the dollar has been “unwelcome and troublesome,” and his remarks helped spur a slight rebound in the dollar Wednesday 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.

Traders and investors seemed to interpret his testimony as a sign that Washington may not want to tolerate the slide much longer.

As a result, 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 89.39 yen in Tokyo, an all-time low, but rose to 91.33 yen in late trading in New York. At its lowest, the dollar was down 8 percent against the mark since March 1, and down 8.2 percent against the yen.

In Washington, Greenspan’s remarks immediately set off a series of partisan recriminations, and put the Fed chairman squarely in the middle of the heated congressional debate over the proper course for GOP tax and budget policies.

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 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 Senator 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.