Friday September 1 6:39 p.m. EDT

Greenspan: Lower Deficit Won't Hurt Dollar

JACKSON, Wyoming (Reuter) - Federal Reserve Chairman Alan Greenspan said that U.S. budget deficit cuts would likely lead to lower U.S. interest rates but would not necessarily weaken the dollar.

Speaking at a conference sponsored by the Kansas City Federal Reserve Bank, Greenspan argued that the dollar could benefit from budget cuts that dampen long-run U.S. inflationary expectations and thus increase demand for the currency.

Many academic economists argue that lower U.S. budget deficits will weaken the dollar because they will lead to lower interest rates.

But Greenspan took issue with that analysis. While short-term demand for dollars might ebb as interest rates fall, long-term demand for the currency might rise as budget cuts boost confidence in the U.S. inflation outlook, he said. ``If we have a significant reduction in the budget deficit, short-term interest rates and intermediate interest rates will fall,'' Greenspan said. ``And other things being equal, the exchange rate will fall.''

But he argued that other things may not be equal and that long-term demand for dollars could overwhelm the short-term effect on the currency from lower interest rates.

Greenspan made clear that he was puzzled by the dollar's weakness this year. ``(Our) ignorance (about the most recent weakness of the dollar) is terribly pronounced,'' he said.