Federal Reserve

Chairman Alan Greenspan helped lift stocks to the best week of 2005 thus far, but not with one of his trademark pronouncements about the state of the economy or monetary policy. Instead, it was the story of the dog that didn't bite, or what the maestro didn't say, both in Wednesday's rate-hike announcement and a Friday speech on trade and currencies.

Apparently, the dollar has fallen enough for the Fed chairman. After helping accelerate the dollar's slide with a speech back in November, he spoke on Friday about reasons why the currency might get a lift. And on Wednesday, the Fed's Open Market Committee stuck to the script of recent rate hikes and gave no signal of more aggressive tightening.

Speaking in London, Greenspan focused more on the bullish side of the dollar and trade equation, offering a mild defense of the current account and trade deficits.

"It has been economic characteristics special to the United States that have permitted our current account deficit to be driven ever higher, in an environment of greater international capital mobility," he said.

Citing one of the favorite arguments of dollar bulls and those who dismiss the significance of the twin trade and current account deficits, Greenspan said the "dramatic increase" in productivity in the 1990s helped U.S. asset values outperform and attract capital here.

The bullish comments, along with Greenspan's earlier aid when he raised rates a quarter percentage point and not more, helped the major averages post their best week of 2005. A couple of big M&A deals and a few choice earnings reports from the likes of


(GOOG) - Get Report


Walt Disney

(DIS) - Get Report



(CVS) - Get Report

also provided some lift.

For the week, the

Dow Jones Industrial Average

gained almost 300 points, or 3%, to 10,716.13, and the

S&P 500

also rose 3% to 1203.03. The

Nasdaq Composite

increased 2% to 2086.66. Google's stock rose 7% for the week to $204.36, Disney added 4% to $29.31 a share and shares of CVS gained 9% to $49.85. Heavy-duty cyclicals like construction and homebuilding companies along with financials and tech companies all benefited from the decent economic news and lessening chance of aggressive rate hikes.

Greenspan's aid on Friday and Wednesday came from what wasn't said, as much as what was. In the Fed's rate hike announcement, there was no change indicating greater fears of inflation or a more aggressive tightening schedule. The economy was still growing at a "moderate pace," inflation was "well contained" and future rate hikes would come in a "measured" way.

In Greenspan's Friday forex speech, there was no mention of his pre-Turkey Day dollar-decline predictions. Last time he addressed the currency topic, in Frankfurt on Nov. 19, Greenspan was a touch more bearish on the dollar, suggesting that foreigners might grow weary of buying dollars (and dollar-denominated assets) due to the huge U.S. trade imbalance and the huge amount already invested in America.

"At some point, diversification considerations will slow and possibly limit the desire of investors to add dollar claims to their portfolios," he said, adding later: "Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point."

Ashraf Laidi, chief currency analyst at MG Financial Group in New York, emphasized that it was what Greenspan left out that moved the dollar higher on Friday.

"Greenspan today offered a more optimistic picture," Laidi wrote. "His approval of the administration's intention to stabilize the deficit is also a plus for the dollar."

Back on Nov. 18, the Fed's major currency dollar index stood at 81.2692, down from 88.4054 a year earlier. Subsequent to Greenspan's Nov. 19 speech, the index ran down to a low of 79.3673 on Dec. 30 but has since rallied; it stood at 81.99 on Thursday. Friday's action won't be reflected until the Fed releases an update next week, but the dollar advanced to a three-month high against the euro of $1.2868 after Friday's speech.

Some also have expressed fears that the weaker dollar would prompt more aggressive Fed rate hikes because foreign exporters might raise prices, adding to inflation pressure in the U.S. Greenspan explained why, at least so far, that hadn't happened.

On the one hand, Chinese exporters haven't been affected because their currency is pegged to the dollar. And in Europe, the dollar drop has prompted gains from hedging and lower profits, but not higher prices, at least so far.

In a passage that didn't get much attention, Greenspan did signal that the dollar's fall could yet generate inflation. "However, we may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins," he said.

Greenspan's speech bolstered the dollar, which had sunk earlier in the day on the slightly weaker-than-expected January payrolls report. Along with downward revisions to the prior two months, the January report was seen as prompting less aggressiveness by the Fed in hiking rates in 2005. The dollar this year has in part been supported by the slowing European economy, and hence the prospect of rate cuts there, while U.S. growth appeared solid and more rate hikes loomed.

The bond market was the biggest beneficiary, as the yield on the 10-year Treasury note rocketed down to 4.07%, the lowest since mid-December, from 4.14% a week ago. In the futures market, contracts linked to the fed funds rate gained ground across the board, indicating lower odds of Fed tightening. The April contract moved up 1 basis point, or 1/100th of a percentage point, to a yield of 2.76%, while the August contract gained almost 6 basis points to a yield of 3.19%.

Pierre Ellis at Decision Economics didn't see the jobs report as all that earth-shattering. The Fed "stays on track, with hawks given one less reason for concern, and doves not seriously troubled," he wrote on Friday.

Further reducing the importance of the January report, the FOMC doesn't meet again until March 22, so the February job numbers, reported on March 4, likely will be of more consequence.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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