Greenspan Spooks European Markets

LONDON -- Most European markets fell Wednesday as U.S. central bank chief Alan Greenspan voiced concerns about soaring stock prices and the risk of higher inflation.


But on currency markets the dollar recovered some of its earlier losses as Greenspan said rising inflation was unacceptable and he could not rule out a pre-emptive interest rate rise.


Shares in London, Frankfurt and Paris that had been marking time ahead of the keynote speech dipped minutes after Greenspan spoke, although he delivered a largely upbeat assessment of the U.S. economy.


"Even I must admit that our economic prospects in general are quite favorable," the central bank chief said in his semiannual Humphrey-Hawkins economic testimony to Congress.


But investors took fright as Greenspan warned that financial markets, including investors in stocks and junk bonds, may be over-optimistic about the economic outlook and urged caution.


"Such caution seems especially warranted with regard to the sharp rise in equity prices during the past two years," he said. "These gains have obviously raised questions of sustainability."


Greenspan credited much of the economy's recent good performance to the low rate of inflation, but he said that may not last.


London, Europe's biggest market, was badly hit, sliding by 0.5 percent as Greenspan cast a cloud over investors. London and other European markets have been trading at record levels in recent weeks.


Wall Street made a negative opening, but most European investors were rattled by the prospect of inflationary pressure pushing up interest rates in the U.S. economy.


"Greenspan. That sums up the Dow slide in a word," said Hildegard Zagorski, analyst at Prudential Securities. "This time he is not hedging. He wants to talk the market down. He is saying we are not in a new era. We should use caution and that there is a possibility of a rate rise if stocks keep going up."


But Wednesday's fall was subdued compared to the reaction to Greenspan's remarks last December about "irrational exuberance" in U.S. asset markets, which caused a temporary nose-dive in stocks on both sides of the Atlantic.


In Paris, shares fell 0.4 percent on the strength of Greenspan's warning. Frankfurt was down in computerized trade before recovering somewhat. Floor trade, which ended before Greenspan spoke, closed up a few points. On the currency front, the dollar recovered most of its losses after dropping by nearly 2 yen and a 1/2 pfennig as dealers grew jittery ahead of the testimony.


The U.S. currency was up 1 pfennig on Tuesday's closing levels as currency dealers saw a hint of interest rate hikes in Greenspan's remarks, making the dollar more attractive to investors.


The dollar also largely regained its poise against the yen, climbing to 122.02 yen.