ALAN GREENSPAN yesterday attempted to soothe fears of a global economic crisis driven by the slide in the dollar and America’s twin deficits.

In a reassuring message ahead of today’s London meetings of the Group of Seven (G7) economies, the Chairman of the Federal Reserve said that the US current account deficit could soon reach a peak and perhaps begin to fall.

But he also sounded a warning over the possibility of US inflation, triggered by a further fall in the dollar, which could force the Fed to raise interest rates more sharply.

Mr Greenspan said that market forces, as well as impending action by Washington to curb soaring US government borrowing, appeared set to ease the threat posed by the current account shortfall.

“Besides market pressures, which appear poised to stabilise, and over the longer run, possibly to decrease the US current account deficit . . . some forces in the domestic US economy seem about to head in the same direction,” he said.

He gave a qualified welcome to President Bush’s plans to curb America’s budget deficit. “The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume,” he said.

Even if the dollar’s slide were to deepen, the US economy could weather the repercussions. He said: “Fortunately, the increased flexibility of the American economy will likely facilitate any adjustment.”

But while the broad thrust of his message was reassurance, he voiced anxiety over inflationary risks. He said foreign businesses may become less willing to cut export prices to offset higher exchange rates. If overseas exporters raised prices, higher US inflation could result. “We may be approaching a point, if we are not already there, at which exporters to the US . . . would no longer choose to absorb a further reduction in profit margins,” he said.

Despite this concern, the optimistic tone of Mr Greenspan’s comments prompted a rally in the dollar after an earlier sell-off triggered by disappointing US jobs figures. The US economy created 146,000 jobs in January, fewer than expected.

Other key figures, however, struck a gloomier tone at yesterday’s Advancing Enterprise conference in London.

Mervyn King, Governor of the Bank of England, said that global imbalances could still trigger disruptive currency moves. He urged a greater co-operative effort between big economies, including China and India.

Throwing his weight behind moves to bring China and India into a wider group, Mr King said: “It is important to expand the group of countries which discuss these issues beyond the G7 to include those, such as China and India, whose actions increasingly have global economic consequences.”

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