ANALYSTS SEE STRENGTH RETURNING TO THE DOLLAR

ANALYSTS SEE STRENGTH RETURNING TO THE DOLLAR

The dollar may soften in the next few days or weeks, but eventually it will resume its upward climb, several currency analysts predict.

Over the long term, the dollar will be bolstered by an improving U.S. economy, a modest tightening in monetary policy, a reduction in the U.S. trade deficit, and the possibility that other major countries eventually will be forced to reduce interest rates as their economies slow.But the dollar's ascent is likely to be fitful, some analysts say, because many of the pro-dollar factors are dependent on the U.S. economy escaping a recession, a development that has not yet been confirmed by economic data.

Last week, the dollar retreated to 1.6980 deutsche marks, after it had strengthened modestly in the preceding five weeks to above DM1.72. On Feb. 6, when the rally began, the dollar stood at DM1.6585.

Last week's dollar drop, some analysts maintain, was a correction to the sharp move up in the preceding two weeks. The question now, these analysts say, is how much further the dollar will fall before it turns up again.

"The short-term trend is lower," said Jonathan Greenspan, a principal with Aegis Capital Management Corp. in New York. "We could test or maybe even set new lows in the near term."

However, once the downside test is completed, Mr. Greenspan said, the

dollar is likely to go substantially higher, a move that will be fueled by rising U.S. interest rates and a slower rate of growth in the U.S. money supply.

"There should be a very good opportunity to buy the dollar when the down cycle ends," Mr. Greenspan said. "At that point, a long-term up move should ensue."

Michael Dever, a principal in Brandywine Asset Management, West Chester, Pa., maintains that the dollar will strengthen dramatically in the next few months as foreign economies begin to slow down. The key is Germany.

"German unification . . . harbors the potential to create enormous inflation pressures and economic dislocations over the next year," Mr. Dever said. "Coupled with the sharply inverted German yield curve, there is the prospect of a severe economic contraction."

The euphoria that has permeated the financial markets regarding German unification will continue to fade in the months ahead, Mr. Dever argues, as it becomes apparent that unification will exact enormous short-term costs on the German economy. As a result, the dollar will rise substantially against the deutsche mark and other European currencies.

Steven Cerier, an economist with Business International in New York, predicts the dollar will strengthen due to the continuing improvement in the U.S. trade deficit, a factor that many other market participants appear to be overlooking.

The reduction in the trade deficit, Mr. Cerier maintains, will be driven by a drop in imports caused by a slowdown in the U.S. economy. At the same time, he believes demand for U.S. exports will remain strong.

Aside from oil, the leading import into the United States is automobiles and automobile parts, Mr. Cerier explained. With the automotive industry slumping, Mr. Cerier expects automotive-related imports will drop sharply, a development that will produce a big improvement in the U.S. trade account.

Although Mr. Cerier and Mr. Dever believe the dollar can strengthen in the face of a U.S. recession, other analysts are banking on renewed growth in the economy to provide a positive environment for the dollar.

In recent weeks, sporadic signs of vitality have convinced many analysts that the United States will avoid a recession. However, the issue is still unresolved.

According to an economic timing model developed by Davis/Zweig Futures Inc., the U.S. economy will grow slowly in the near future. The model, the firm claims, has correctly indicated the direction of the economy in 16 out of 17 forecasts since 1948.

If the Davis/Zweig model is correct, Federal Reserve policy probably will remain steady in the near future.