DEUTSCHE MARK SHINES AS HOPES RISE FOR STRONG EURO, GROWTH IN ECONOMY

DEUTSCHE MARK SHINES AS HOPES RISE FOR STRONG EURO, GROWTH IN ECONOMY

Optimism surrounding Europe's planned economic and monetary union carried the Deutsche mark higher last week as traders adjusted their positions for the advent of the euro.

''The skepticism about EMU is gone. You hear more and more talk about a strong euro,'' said Earl Johnson, foreign exchange economist at Bank of Montreal in Chicago.Not only is monetary union a fait accompli, but some economists feel the euro will pose a challenge to the U.S. dollar as the world's dominant currency, he said. The German economy appears to be getting stronger and there could be a rise in the Bundesbank's securities repurchase rate before too long, he said.

A favorite play late last week was to sell Japanese yen and purchase Deutsche marks, analysts said, and that trend could continue into this week. Fears of Bank of Japan intervention restrained the dollar, but it rose above 133 yen on Friday to the highest level in nearly three weeks.

''The threat of intervention is there, because the dollar is back to levels against the yen where the Bank of Japan last intervened,'' said Bob Lynch, currency strategist at Paribas in New York. Nonetheless, the underlying fundamentals still suggest that the dollar will continue to grind higher against the yen, Mr. Lynch said. The market is somewhat emboldened because aggressive intervention by the Bank of Japan in early April had very little effect in strengthening the yen, analysts said.

Marc Chandler, senior analyst at Deutsche Bank in New York, pointed out that Japan's reserves fell $17.84 billion in April, lending support to estimates of Bank of Japan intervention of around $20 billion.

MARKET FOCUS TO SHIFT

TO APRIL JOBS REPORT

Later this week, the market's focus will shift to the U.S. employment report for April, to be released on Friday. Non-farm payrolls are expected to show a moderate rise of around 235,000, with some estimates as high as 350,000.

''The financial markets started worrying about Federal Reserve tightening (early last week), but the fears are fading because of good inflation data,'' Mr. Johnson said.

He said almost no one expects the Fed to raise interest rates at the May 19 meeting of the Federal Open Market Committee. ''The Fed is on hold indefinitely,'' he said.

Mr. Johnson forecast that U.S. economic growth will slow to around 2.5 percent at an annual rate in the second quarter after the 4.2 percent rise reported for the first quarter. A rising trade deficit and falling consumer spending will slow the economy, he said. Additionally, the increase in inventories in the first quarter and the fourth quarter of 1997 cannot continue, he said.

The April report from the National Association of Purchasing Management, released Friday, suggested some slowdown in the manufacturing sector as well as the overall economy in the second quarter, economists said.

The diffusion index fell to 52.9 in April from March's 54.8. The report also showed inflation remained subdued. The price index fell, to 41.2 from 44.4.

WILL CHINA RENEGE

ON DEVALUATION PLEDGE?

The yen fell suddenly last Thursday after Stanley Fischer, first deputy managing director at the International Monetary Fund, said that China might devalue the yuan ''down the road.''

''Chinese officials have been seriously considering the possibility of a devaluation of the yuan next year,'' said Richard Medley, principal at Medley Global Advisors.

Senior economic advisers to Premier Zhu Rongji believe that the yuan should not be as strong as the dollar and not be tied to it either, Mr. Medley said.

''Officials believe the U.S. economy has the ability to innovate and big potential for growth, and they do not feel that the Chinese economy can keep up,'' he said.

When the devaluation takes place depends on how quickly exports fall, Mr. Medley said.

China's domestic demand is very soft and inventories are already sky high, he said. Most enterprises do not expect good earnings and are loath to invest, he said.

Mr. Medley quoted one senior Chinese official as saying, ''The 8 percent growth rate (target) was set not to show how great China is at a time of economic woes in its neighboring countries, but must be seen as a desperate attempt to ward off social unrest.''

Some in Mr. Zhu's staff believe he is being set up and that he will be made a scapegoat in the end, Mr. Medley said.