US securities face investor apathy

Washington: The decline in the dollar reflects the unwillingness of foreign investors to buy US securities, former US Federal Reserve chairman Alan Greenspan said yesterday.

"Obviously there is a limit to the extent that obligations to foreigners can reach," Greenspan said in Washington. "The dollar has fallen to its lowest since 1997 and that may be 'an indication America is approaching this limit."

The US Treasury reported last week that international investors sold a record amount of US stocks, bonds and other financial assets in August.

Prediction coming true

Greenspan has long been predicting foreign investors would get tired of financing the country's current-account deficit. In 2004 he said 'a diminished appetite for adding to dollar balances must occur at some point'.

The dollar's share of world foreign-exchange reserves has slipped as central banks sought alternatives to the currency in recent years.

The dollar's proportion fell to 64.8 per cent in June, from 71.8 per cent seven years before, International Monetary Fund figures show. The euro jumped almost eight percentage points to 25.6 per cent during the period.

The liquidity and size of euro-denominated financial markets are approaching those of dollar markets, Bank of International Settlements economists Gabriele Galati and Philip Wooldridge wrote in a paper a year ago.

Delivering the annual Per Jacobbson Foundation lecture here, Greenspan defended his conduct of monetary policy during his time as Fed chairman, and also argued that recent fin-ancial market turmoil represented an example of "creative destruction", referring to the innovative financial instruments that have caused the recent troubles.

According to him, the biggest threat to the world economy comes not from global financial imbalances but from the protectionist sentiment these imbalances are generating.

Sovereign funds

He acknowledged the danger that the sovereign wealth funds might not be guided only by financial considerations and that they could be used for "political purposes". The protectionism arising as a reaction to it could damage financial markets more.

Commenting on the current financial market turmoil, Greenspan rejected the idea that low interest rates during much of his term in office (1987-2006) were responsible for a housing bubble in the US, which eventually resulted in the sub-prime mortgage market crisis. "This would not explain housing bubbles in other countries where rates were higher," he said.