PLUNGING LIRA DRAGS DOLLAR DOWN WHILE BOOSTING THE DEUTSCHE MARK

PLUNGING LIRA DRAGS DOLLAR DOWN WHILE BOOSTING THE DEUTSCHE MARK

The collapse of the Italian lira on Friday boosted the German mark and booted the dollar down the slippery slope.

More dollar-tobogganing is in the cards, traders and analysts said, with the Italian government in danger of falling and the French franc suspect."The dollar looks very weak and is heading for new lows against the mark," said Earl Johnson, vice president and foreign exchange economist at Bank of Montreal in Chicago.

The political turmoil in Italy, France and Spain is putting spit and polish on the German currency, he said.

Rocco Buttiglione, the leader of Italy's Christian Democratic Union, a small but key member of Silvio Berlusconi's center-right block, said Friday that the resignation of Lamberto Dini's Cabinet and the formation of a new government could be the only way out of the current crisis.

The lira came under renewed attack following the ouster of Justice Minister Filippo Mancuso late Thursday and the news Friday that former Premier Silvio Berlusconi was presenting a no-confidence motion in Lamberto Dini's government that will be debated Tuesday.

The lira fell sharply despite reported Bank of Italy intervention just below 1,140 lire to the mark. The lira was also undermined by heavy selling on the Italian bond and bond futures markets.

Weakness in the lira helped depress the French franc and other European currencies against the mark, which in turn lifted the German currency against the dollar and the Japanese yen.

The dollar fell through support at 1.40 marks, a development of some concern to technical analysts who base their forecasts on chart formations.

The franc slumped on speculative selling, as traders bet the Bank of France will have to abandon its "franc fort," or strong franc policy in order to lower interest rates to get the economy growing and to relieve pressures from high unemployment.

The British pound also took it on the chin Friday, falling in response to a weak dollar and to U.K. political uncertainty.

That left the mark to extend its impressive gains of earlier in the week. ''The dollar did not have a good week against the mark," said Bob Lynch, currency analyst at MMS International.

Last week's bullish trade data gave the dollar a one-day lift, but they didn't change the bearish tone in the market, Mr. Lynch said. "The dollar's rise on the trade data was just short covering," he said.

France is being forced to run a very tight monetary policy in defense of the franc, at the same time that fiscal policy is being tightened and economic growth is slowing, said analysts at Banque Paribas.

Comments from German officials on European monetary union punctured the

dollar's rise earlier this month. The pressure was felt first on the French franc. The current policy mix in France cannot continue, analysts said.

"We expect the solution will be a weaker French franc," said the Banque Paribas analysts. "This will eventually force the Bundesbank to cut interest rates" to give France some breathing room, they said.

Meanwhile, the dollar must contend with the U.S. budget uncertainties until the middle of November, Mr. Johnson of Bank of Montreal said. "If this thing gets out of hand, we could be hearing talk of record lows for the dollar," he said.

The key U.S. economic data for the week, preliminary estimates of third quarter growth and inflation, are due out on Friday. A strong rise in gross domestic product of 2.8 percent is expected, along with "benign deflators," said Mr. Lynch of MMS International. The GDP deflators are considered one of the more accurate measures of inflation, but it is hardly news that price pressures have evaporated, he said.

The dollar's reaction to the GDP report likely will depend on what happens in the U.S. bond market, Mr. Lynch said. "The dollar will key off bonds," he said.

Meanwhile, analysts said, the dollar will be caught in the cross-fire of Europe's monetary turmoil. There could be central bank intervention to stem the tide, but it won't be enough to get the dollar's rally back on track, they said.