DOLLAR RISE AGAINST YEN IS EXPECTED TO CONTINUE

DOLLAR RISE AGAINST YEN IS EXPECTED TO CONTINUE

The dollar's surge against the yen is slowing, but analysts are skeptical that the trend has turned.

In the last two weeks, the dollar has traded in a range of about 157 to 159 yen, the longest period of consolidation since the dollar began to rally against the Japanese currency eight weeks ago.The question now, analysts say, is whether the dollar will resume its uptrend against the yen or whether it will begin to fall back.

Over the long term, Steven Cerier, an economist with Business International in New York, predicts the dollar will continue to strengthen against the yen, rising to over 160 yen later this year and to an average value of 182.40 in 1991.

"We believe that a sharply narrowing trade surplus, continued large capital outflows, concern over rising inflation and falling equity prices will keep the Japanese unit under pressure," Mr. Cerier wrote.

In the short term, however, analysts suspect that the Bank of Japan may raise interest rates, a move that could send the yen higher, at least temporarily.

Last week, following the Group of 7 meeting in Paris, it became apparent there was no agreement on a yen-support package. Although Group of 7 central banks intervened to support the yen on the day following the meeting, the amount of intervention was quite small.

Many analysts believe that the other Group of 7 nations told Japanese officials, in effect, that the weak yen stems from Japan's monetary policy mismanagement and that Japan must raise interest rates before the Group of 7 can even consider implementing a yen-support plan.

Several weeks ago, Japan delayed an expected increase in its discount rate, a development that led to an unseemly squabble between the Bank of Japan and the Finance Ministry. Since then, it has held rates steady and relied on direct intervention to support the yen.

Traders estimate that the Bank of Japan has been spending upwards of $1 billion a day to buy yen. Although the intervention occasionally causes the market to pause, it has been ineffective in bolstering the yen.

Japan has resisted raising interest rates again, in part because of fears about the stock market. After rising for 12 consecutive years, the Tokyo stock market has dropped over 20 percent this year, a move that has led many Japanese investors to place money overseas.

Two factors could help the yen in the near future: Yen-denominated interest rates are now roughly equivalent to U.S. rates for the first time in years and there's a possibility that U.S. rates will move lower in reaction to lower inflation and new signs of a weakening economy.

Inflationary indicators such as gold, crude oil and commodity prices are pointing to much lower inflation in coming months, noted Brian Wesbury, vice president of Stotler Economics in Chicago.

In the long run, Mr. Wesbury forecast, lower inflation will lead to a stronger dollar. In the short term, however, the dollar may fall because of the prospect that lower inflation will lead to lower interest rates.

In a similar vein, the March employment report quelled sentiment that the U.S. economy is stronger than generally anticipated and that the Federal Reserve's next policy move will be toward tightening.

The 26,000-job increase in non-farm payrolls in March was the smallest monthly rise in four years. Moreover, the report indicated that the manufacturing slump - 31,000 jobs were lost in March - continues.

It should be noted that while the dollar has been strong against the yen, it has weakened recently against many other currencies. The U.S. dollar index, a composite value of the dollar, has fallen nearly 2 percent in the past two weeks.

Apart from the yen, traders are looking most closely at the deutsche mark to determine how monetary union between East and West Germany will be arranged.

Generally, the West German central bank is advocating a cautious approach to dampen the inflationary effects of monetary union.

However, a number of politicians favor a 1-to-1 swap of East German marks for deutsche marks, an approach that the currency market views as inflationary.

Resolution of the dispute between the Bundesbank and leading politicians probably will determine the next big move for the deutsche mark, and quite possibly for the dollar.