What a Week: Greenspan Trips the U.S. Dollar

Updated from 3:34 p.m. EST

"Seems like that guy singing this song has been doing it for a long time -- is there anything he knows that he ain't said?"

-- Falling from Above, Neil Young

During his 17-year tenure, Federal Reserve Chairman Alan Greenspan has gotten credit for rescuing the economy many times, including after the 1987 stock market crash, the Russian debt default, the popping of the Internet bubble and the terrorist attacks on 9/11. This week saw a lengthy two-part profile highlighting some of those achievements in The Wall Street Journal.

On Friday, Greenspan was back on the lecture circuit, trying to shoot down the latest possible threat to U.S. economic stability: a dollar crash.

Speaking at the European Banking Congress in Frankfurt, Greenspan acknowledged that the U.S. couldn't count on the world's munificence forever. Thank to the U.S. consumer's appetite to buy exports with borrowed funds and the government's inability to balance its budget, the country is running up a record current account deficit. Foreign investors are plugging the gap to the tune of $2.6 billion a day.

That situation can't continue indefinitely, Greenspan said. "It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," he said. A diminished appetite could in theory result in a falling dollar, which would stoke inflation and require much higher interest rates.

The markets didn't take too kindly to Greenspan's speech, ending a three-week winning streak. For the week, the Dow Jones Industrial Average was down 0.8% to 10,456.91, the S&P 500 lost 1.2% to 1170.34, and the Nasdaq Composite dropped 0.7% to 2070.60.

Greenspan's remarks overshadowed a busy week of corporate news, highlighted by the Kmart (KMRT)-Sears (S) merger; a Senate hearing on Merck's (MRK) Vioxx recall; Fannie Mae's (FNM) delayed 10-Q filing; and earnings from tech heavyweights Hewlett-Packard (HPQ), Applied Materials (AMAT) and Network Appliance (NTAP).

Bears on Board

Not wanting to spark a panic, the Fed chairman peppered his remarks with vague statements about the unknown timing of any correction. Six times he added caveats to his prediction of a dollar decline such as "at some future point," "eventually" and "at some point."