TRADE NUMBER TUESDAY MAY MOVE THE DOLLAR

TRADE NUMBER TUESDAY MAY MOVE THE DOLLAR

The March U.S. trade deficit announcement on Tuesday will determine the short- term direction to the dollar.

Traders expect the deficit to range between $11.5 billion and $12.5 billion, substantially better than last month's figure of $13.8 billion.But most traders believe the down-side potential resulting from a higher- than-expected trade deficit number is greater than the upside potential

from a lower-than-expected figure.

Markets know that one-month's figure doesn't make a trend, said David Simmonds, chief economist of Midland Bank PLC in London. But two bad figures in a row would be worrisome.

In recent days, the market has traded in a narrow range of 1.6750-1.6850 deutsche marks. One side of that range probably will be broken if the trade deficit differs from market expectations.

Earl I. Johnson, vice president of foreign exchange for Harris Bank in Chicago, forecasts the deficit at $11 billion, a level which he says could push the dollar up to 1.70 deutsche marks.

March has been the third smallest deficit in the past two years, Mr. Johnson noted. We usually get very good export growth in March. The question is whether the strong imports of last month will continue.

If imports remain strong and the March deficit is over $14 billion, that augurs for even worse deficits in the summer months, Mr. Johnson adds.

The first quarter usually has the smallest deficits and the third quarter the biggest, Mr. Johnson posited. So if we're running at $14 billion in the first quarter, we're going to have $15 billion, $16 billion or bigger in the third quarter.

Most traders expect the dollar to react swiftly to Tuesday's trade deficit announcement, but the U.S. unit probably will fall back into a narrow trading range by the end of the week.

The dollar could go as high as 1.72 deutsche marks or as low as 1.65 deutsche marks in reaction to the trade figure, said David Cocker, vice president of foreign exchange for Chemical Bank in London. But following the initial move, he believes the dollar will trade in a narrow range.

If anything, the dullness in the dollar market may become even more pronounced, judging by currency options prices, noted Ted Nakagawa, vice president of foreign exchange for the Long-Term Credit Bank of Japan in New York.

Normally, currency option prices increase before the monthly trade deficit announcements in anticipation of greater currency price volatility. However, last week currency option prices continued to decline, despite the approaching trade deficit announcement.

Mr. Nakagawa noted that the dollar's yearly low of 120 yen was reached on Jan. 4. On Jan. 15, the dollar reached it's yearly high of 130 yen. Since then it has stayed within that range.

From a technical point of view, Mr. Nakagawa said, the dollar has established a large triangle formation, a development which he says indicates that the dollar has a great deal of pent-up energy.

I don't know when it will break out of this range, Mr. Nakagawa said. But it's ready to move very sharply.

With the dollar locked in that narrow range, currency traders continue to focus on high-yielding currencies such as sterling, the Canadian dollar, and the Australian dollar.

Sterling's strong rally continued last week on the strength of a bullish forecast from David Morrison, a Goldman Sachs economist in London. In addition, a quarterly bulletin from the Bank of England was interpreted by currency traders as indicating that the Bank of England's priority is fighting inflation, a course of action that is bullish for sterling.