On November 28, 1990, Federal Reserve Chairman Alan Greenspan told the House Banking Committee that despite possible benefits to the U.S. trade balance, ‘‘a weaker dollar also is a cause for concern.'' This statement departed from what appeared to be an attitude of benign neglect by U.S. monetary officials toward the dollar's depreciation. He also rejected the notion that the Fed should aggressively ease monetary policy, as some Treasury officials had been urging. At the same time, Greenspan did not mention foreign exchange market intervention to support the dollar's value.
a. What was the likely reaction of the foreign exchange market to Greenspan's statements? Explain.
b. Can Greenspan support the value of the U.S. dollar without intervening in the foreign exchange market? If so, how?