March 2 (Bloomberg) -- The dollar rose against the euro as Federal Reserve Chairman Alan Greenspan said the U.S. economy is expanding at a ``reasonably good pace,'' while a European Union report showed growth in the region stagnated.

The dollar is up 3.2 percent this year against the euro on expectations the Fed will add to six interest-rate increases since June while the European Central Bank keeps its benchmark unchanged. ``The economy is now developing its own momentum,'' Greenspan told the House Budget Committee today in Washington.

``There's no doubt the U.S. economy is in much better shape than Europe,'' said Paresh Upadhyaya, a currency portfolio manager who is part of a team overseeing $29 billion at Putnam Investments in Boston. ``That is in great part why we are seeing some support to the dollar at the start of the year.''

Against the euro, the dollar rose to $1.3137 at 4:01 p.m. in New York, from $1.3188 late yesterday, according to electronic currency-trading system EBS. The dollar advanced to 104.66 yen, from 104.39, breaking a three-day slide. It is higher today against all major currencies except the Canadian and Taiwanese dollars and the Mexican peso.

The dollar may appreciate again below $1.30 per euro in the next few months, Upadhyaya said.

Euro losses also came as a report showed growth in the 12 nations sharing the currency stagnated in the fourth quarter as a slowdown in exports overshadowed an increase in consumer spending.

Gross domestic product expanded 0.2 percent from the previous three months, the Luxembourg-based European Union statistics office said today. Third-quarter growth was revised down to 0.2 percent from a previous 0.3 percent. The fourth- quarter figure is in line with a Feb. 15 estimate.

Rate Gap

The Fed has lifted its target rate by a quarter percentage point at each of the past six meetings, to 2.5 percent. The ECB has kept its benchmark rate at 2 percent since June 2003, and may again leave it at a six-decade low at tomorrow's policy meeting, the median forecast in a Bloomberg survey shows.

Ten-year U.S. Treasury yields are more than a quarter percentage point higher since Greenspan told a Senate committee on Feb. 16 that the persistence of low longer-term yields was a ``conundrum.''

``Compared with Europe, the U.S. is where the growth will be,'' said Naeem Wahid, a currency strategist at HBOS Plc in London. ``This is giving the dollar some support.''

`Vulnerable' Currency

The dollar pared some gains against the euro and yen as Greenspan also said current federal budget policy is ``unsustainable'' and Congress must cut the deficit and shore up funding for Social Security and other benefit programs.

The testimony ``should hopefully bring home to the market that just promising to cut the budget deficit in half'' is insufficient, said Steve Barrow, head of currency strategy at Bear Stearns Cos. in London. ``If this doesn't occur, the dollar looks like a very vulnerable currency.''

The White House predicts the budget shortfall will reach $427 billion this year. President George W. Bush pledges to halve the gap by 2009.

Former Federal Reserve Bank of Dallas President Robert McTeer, speaking in a televised interview with Bloomberg News, said there's probably ``more dollar weakness ahead.''

The dollar fell the past three years against the euro and yen, partly on concern the record budget shortfall would dim foreign appetite for U.S. assets.

Greenspan today also said there's ``very little evidence'' foreign investors are starting to sell U.S. dollar assets, though he noted it could happen in the future.

``There does come a time when it's conceivable that you're holding too much of your assets in one set of countries and merely for diversification purpose one would evidently start to move,'' Greenspan said. ``That may occur somewhere down the line.''

European Growth

The 12-nation euro region's economy grew 2 percent last year, when the U.S. expanded at a 4.4 percent pace. Government figures yesterday showed unemployment in Germany, Europe's largest economy, rose to a postwar high in February.

``The numbers out of Europe have been terrible,'' said Minoru Shioiri, senior manager of the treasury and foreign exchange division in Tokyo at Mitsubishi Securities Co., a unit of Japan's second-biggest lender. ``That's another factor driving the euro down and the dollar up.''

Demand for the euro also fell today after Market News reported the ECB reduced its economic growth estimates for the euro region. The bank cut its estimate for 2005 growth to 1.6 percent, from 1.9 percent, Market News said. The bank's projections assume the euro will have an average exchange rate of $1.30 through 2007, below the currency's current value, Market News said.

ECB spokesman Niels Buenemann declined to comment.

``The ECB has long been more optimistic than the market in terms of the growth outlook now it has scaled back its own expectations,'' said Daragh Maher, a currency strategist in London at Calyon, the securities unit of Credit Agricole SA. ``It should postpone any rate hikes.''

Japan's currency dropped after Bank of Japan Governor Toshihiko Fukui said the economy hasn't strengthened enough yet to withstand possible shocks. Continued deflation, or falling prices, means Japan is ``not completely resistant'' to shocks, Fukui said in parliament in Tokyo today. Japan last year entered its fourth recession since 1991.

To contact the reporters on this story: Mark Tannenbaum at mtannen@bloomberg.net Vivianne Rodrigues at vrodrigues@bloomberg.net

Last Updated: March 2, 2005 16:06 EST