DOLLAR WILL RISE ON INFLATION DATA, STRONG RETAIL SALES, TRADERS SAY

DOLLAR WILL RISE ON INFLATION DATA, STRONG RETAIL SALES, TRADERS SAY

The U.S. dollar will rise this week on the October inflation reports, due Tuesday and Wednesday, and an expected surge in retail sales to be reported on Friday, foreign exchange traders and analysts said.

"The dollar's rally will continue," said David S. Gilmore, vice president of Currencywatch at McCarthy, Crisanti & Maffei Inc."The U.S. economy is looking stellar next to Germany and Japan," Mr. Gilmore said.

He described last Friday's report of a 177,000 rise in October non-farm payrolls as "decent." He said the U.S. economic "numbers keep coming in positive and the market can't ignore them."

The dollar rose to a three-month high against the deutsche mark Friday before slipping back on profit-taking.

Earl Johnson, vice president and chief corporate foreign exchange trader at Harris Trust and Savings Bank, Chicago, said the October jobs data "were a little better than expected. The bullish sentiment is building for the

dollar."

He predicted the dollar will rise to 1.75 deutsche marks by the end of the year.

It is likely, Mr. Johnson said, that the Bundesbank will cut German interest rates in December.

Long-term U.S. interest rates rose sharply last week amid fears the accelerating economy will result in worsening inflation. The October price reports could lift the dollar further, Mr. Johnson said.

Analysts said the Federal Reserve could shift to a tightening bias at the Federal Open Market Committee meeting Nov. 16. Then the Fed would be in a position to make a pre-emptive strike against inflation by boosting short-term interest rates.

Marc Chandler, senior market strategist at I.D.E.A. Inc., said both the producer price index (Tuesday) and the consumer price index (Wednesday) will show increases of about 0.4 percent.

"The Fed may be leaning toward a tightening early next year," he said.

Steep losses in bond and stock markets worldwide will have a major impact on capital flows, which could influence the dollar's value, Mr. Chandler said.

"U.S. investors poured tons of money into European stock and bond markets, and it looks like these markets have reversed," he said.

The Japanese yen could be helped by the heavy losses in the Tokyo stock market, Mr. Chandler said. Japanese banks will sell their offshore assets and bring the money back to Japan to boost their loan loss reserves, he predicted.

Francoise Soares-Kemp, member of senior management in the private banking group at Credit Suisse, said, "Capital flows are the dominating force in the market. Funds will flow back to European markets to shore up the fragile situation there.

"Capital outflows from the United States will start and the U.S. bond market will get hammered," she said. "U.S. markets are vulnerable to foreign selling. We're in a borderless world and it's very hard to see cause and effect."

As global stock and bond markets enter a major correction and start cascading downward, she said, "the recessionary economies start looking like a better place to put your funds."

Analysts said the dollar could get a short-term boost if the North American Free Trade Agreement is voted down in Congress next week. The rise of protectionism such an event would signal, as well as general uncertainty, could trigger a flight to the relative safety of the U.S. dollar.

However, a defeat for the Nafta "would be a major slap in the face for President Clinton, a major failure," Ms. Soares-Kemp said. The dollar could decline if the United States is perceived as having an ineffective leader, she said.

David C. Munro, chief U.S. economist at High Frequency Economics, disagreed with some forecasts of a 1 percent surge in October retail sales, to be reported on Friday.

He said the non-auto sector of the report will show an increase of about 0.5 percent, "showing no sign of accelerating along with vehicle sales."

Mr. Munro said "economic indicators are not heating up to the extent of (last) week's chilling in the markets."