Market forces and likely action by Washington to cut its budget deficit "appear poised" to stabilize, and perhaps cut, the record U.S. trade gap, Federal Reserve Chairman Alan Greenspan said on Friday.
"Besides market pressures, which appear poised to stabilize and over the longer run possibly to decrease the U.S. current account deficit and its attendant financing requirements, some forces in the domestic U.S. economy seem about to head in the same direction," Greenspan said in remarks prepared for delivery at a conference hosted by the British Treasury.
"The voice of fiscal restraint, barely audible a year ago, has a least partially regained volume," the influential Fed chief said in an apparent nod to the Bush administration's pledges to hold down government spending.
In November, Greenspan had said the United States should reduce its budget deficit to protect its economy from an inevitable dwindling of the overseas appetite for dollar assets. His comments on Friday suggested more comfort with the likely direction of U.S. fiscal policy.
Analysts also said Greenspan seemed more optimistic growth in U.S. current account gap would stabilize. The dollar, which had fallen steeply earlier in the day on a weak U.S. jobs report, more than recovered on Greenspan's comments.
The remarks came just hours ahead of a meeting of finance ministers and central bankers from the Group of Seven wealthy nations, where the subject of the U.S. budget and trade deficits -- and value of the dollar -- look to loom large.
Another issue on the table at the G7 talks will be China's currency peg. Greenspan said intervention in foreign exchange markets by China and other Asian countries "may be supporting" the dollar and U.S. government bonds, but the effect "is difficult to pin down."
Analysts have said a fall in the value of the dollar over the past 3 years had partially reflected nervousness over record U.S. budget and trade gaps.
Greenspan said the willingness of overseas businesses that export to the United States to accept lower profits, which has helped hold down U.S. import prices, may wane if the dollar fell further.
"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 said higher U.S. import prices would cut the volume of imports "but leave the resulting value of imports uncertain."
The Fed chief said an apparent increase in profits enjoyed by U.S. exporters was a good omen both for future exports and the likelihood the shortfall in the U.S. current account, the broadest measure of the nation's trade, would lessen.
The U.S. current account gap is running close to 6 percent of gross domestic product, a level economists -- and Greenspan -- have warned is unsustainable over the long haul.
"I have argued elsewhere that the U.S. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity," Greenspan said.
"The argument will be tested, I suspect, by possibly new twists and turns that will emerge in a seemingly ever-more complex international economic and financial structure," he said.
Greenspan will join U.S. Treasury Undersecretary John Taylor at the weekend gathering of finance officials from the G7 nations, the United States, Canada, Britain, Japan, Germany, France and Italy.
The discussions, which kick off with a dinner on Friday and conclude on Saturday. Taylor is sitting in for U.S. Treasury Secretary John Snow, who is home with a chest cold.