DOLLAR MAY RISE BRIEFLY, DECLINE LAT ER IN 1988

DOLLAR MAY RISE BRIEFLY, DECLINE LAT ER IN 1988

The U.S. dollar is more likely to rise than to fall during the next few months, but it should begin to depreciate again during the second half of 1988, a leading bank economist will tell Congress today.

Jerry L. Jordan, senior vice president and chief economist of First Interstate Bancorp, Los Angeles, says the dollar could rise into the range of 135 to 140 yen and 1.70 to 1.75 deutsche marks in the near term. The dollar was trading Tuesday just above 128 yen and 1.68 deutsche marks.Although the U.S. trade deficit will drop by some $20 billion to $25 billion in 1988, it will still be very large in absolute terms, Mr. Jordan says in remarks prepared for delivery today to the House Budget Committee.

Nevertheless, we do not believe that the dollar must fall substantially further in order to begin making concrete progress in reducing the trade deficit, nor do we believe that the existence of a trade deficit means the

dollar must continuously decline, he adds.

Mr. Jordan notes the dollar was dropping rapidly late last year because of growing foreign investor concerns that U.S. policies would remain excessively expansionary in an effort to inflate out of our fiscal dilemma.

As the year ended, a combination of upward revisions of forecasts and perceptions about foreign economies and downward revisions in forecasts about U.S. inflation and real growth produced a more positive short-run outlook for the dollar, he says.

Because we expect these conditions to prevail for the next few months, the

dollar could rise, he adds.

Mr. Jordan predicts higher real U.S growth plus somewhat higher U.S. inflation will cause the dollar to begin to decline again in the second half of this year, in spite of the somewhat higher interest rates that we also forecast later this year.

The First Interstate economist says U.S. fiscal policies have produced an environment that has been associated with higher monetary growth and higher inflation in the United States than in most of the other major industrialized countries, which has contributed to the sustained decline in the dollar.

Since we believe that the United States will continue to have higher inflation than most of the other large industrialized economies through 1989, the dollar is likely to gradually decline further from current levels, he says.

America's foreign creditors are monitoring developments in this country for signs of fiscal and monetary discipline, Mr. Jordan will warn Congress. The sustained current-account deficits and recent net-debtor status of the United States have created a dependency on foreign savings flows that cannot be ignored in considering fiscal and monetary alternatives.

Mr. Jordan predicts continued U.S. economic expansion in 1988, with real gross national product rising nearly 3 percent, saying, The probability of a recession occurring in 1988 is very small. However, he adds, an increase in inflation and subsequent tightening of monetary policy could produce a recession in 1989.

Inflation, measured in terms of consumer prices, is expected to move up to 5 percent this year, he says, with past monetary expansion the main cause of this increase. The dollar's decline will drive up import prices further, and wages are likely to lag behind price increases, he adds.