Federal Reserve Chairman Alan Greenspan said Friday the dollar's strength against the new European currency, the euro, stems from America's better performance in boosting the productivity of the work force.

While cautioning that it is always difficult to forecast directions in currency rates, Greenspan said the dollar's surprising strength owed a great deal to a more flexible U.S. workplace. 

"Over the decades, Europe has sought to protect its workers from some of the presumed harsher aspects of free-market competition," Greenspan said in a speech to a Washington business group. "To discourage layoffs, discharging employees was made more difficult and costly compared with doing so in the United States." 

Greenspan said this difference in workplace flexibility was especially important in new fields such as high-tech, because startup firms have a critical need to find innovative ways to cut costs. 

If a country's laws prohibit the easy hiring and firing of workers, that will limit the number of entrepreneurs willing to invest in new technologies, he said. 

Greenspan said providing capital in new areas of technology offers investors greater chances to make large returns on their money. But restrictions in one country, such as tight labor market rules, will dampen the desire of foreigners in particular to make such investments. 

Since the United States has fewer labor force restraints when compared to Europe, investors view America as a superior place to make investments and earn bigger returns. Greenspan said this has been a key force boosting the value of the dollar compared to the euro. 

The greater U.S. labor market flexibility has helped American companies be more productive, attracting foreign capital even as America's trade deficit has soared to record highs. 

"The steady flow of capital from Europe to the United States in recent years is, presumably, the consequence of Europeans finding many investments in the United States persistently more attractive than those at home," Greenspan said. 

Greenspan has been a major proponent of the view that the United States has entered a new era of greater productivity growth because of the large investments made in information technology. 

In response to questions from the audience at the event, sponsored by the Euro 50 Group, he said productivity was holding up even in the midst of the current economic slowdown, which began more than a year ago. 

"The data we've been experiencing in this country in the last year and a half has solidified the view that something different happened in the second part of the 1990s" in terms of a sharp rebound in annual productivity growth, Greenspan said. 

The government reported before Greenspan spoke that the economy shrank at an annual rate of 1.1 percent in the July-September quarter, and many analysts believe the downturn will be even more pronounced in the current quarter. 

However, Greenspan made no comments about the overall economy or interest rates during his appearance. Many private forecasters are looking for the Federal Reserve to cut interest rates for an 11th time when the central bank next meets on Dec. 11 in a continued effort to restart an economy that slipped into a recession in March. 

The euro, the common currency of Germany, France and 10 other European countries, was adopted in January 1999. 

While there were predictions that it would overtake the U.S. dollar as the dominant international currency, this has not happened and Greenspan said it is unlikely to happen for some time to come. 

"These expectations were probably overstated. History has shown us that once currencies achieve the status of an international vehicle currency, as the guilder and pound did in previous centuries, the established infrastructure of deep and liquid markets favors their continuing to be used." 

Greenspan said that even though the dollar is still the world's top reserve currency, the euro meets all the criteria to be considered a major currency. These include the fact that the combined economies of the countries in the euro area are essentially the same size as the United States and both areas have strong banking systems and open trade. 

Greenspan said the future value of the dollar and the euro on global foreign exchange markets will be determined by decisions investors in both areas make on where to put their money. 

"The future will be determined, at least in part, by the success in Europe of matching the expected rates of return on U.S. assets," Greenspan said.