TRADERS SAY STRENGTHENING ECONOMY, EUROPE RATE CUTS WILL BOOST DOLLAR

TRADERS SAY STRENGTHENING ECONOMY, EUROPE RATE CUTS WILL BOOST DOLLAR

The U.S. dollar will rise this week on bullishness about the U.S. economy and expectations of more interest rate cuts in Europe before the end of the year, foreign exchange traders and analysts said.

"Everything is lining up behind the dollar - growth differentials, interest rate differentials and the technicals," said Earl Johnson, vice president and chief corporate foreign exchange trader at Harris Trust and Savings Bank, Chicago.Technicians, who follow chart formations, found it significant that the

dollar formed a "double bottom" at 1.59 deutsche marks and that the trend lines are favorable for the dollar, Mr. Johnson said.

The dollar soared to DM1.67 after the Bundesbank took the market totally by surprise and lowered its discount and Lombard rates by a half point, effective Friday.

"The dollar appears to be headed for a new trading range of 1.70 to 1.75," Mr. Johnson said.

Hubert Pedroli, vice president and head corporate trader at Credit Suisse, said the dollar "has bottomed out" and will remain strong at least for the remainder of 1993.

The European economies are so weak that it makes the U.S. economy look attractive, he said. "U.S. consumer confidence is improving, and President Clinton at least is attacking the problems of the budget deficit and health care," he said.

Traders and analysts said the dollar could get a sudden boost if the global trade talks appear to be breaking down.

Tom Hutchinson, foreign exchange analyst at MMS International, said an unsuccessful conclusion to the U.S.-Japan trade talks (facing a Nov. 1 deadline on construction), failure of Congress to pass the North American free-trade agreement or collapse of the Uruguay Round of trade talks under the General Agreement on Tariffs and Trade "wouldn't be good for anybody, but would be a net positive for the dollar."

The initial reaction would be a flight to the safety of the dollar, he said. A rise in protectionism would hurt the United States less than Europe or Japan, because trade accounts for a smaller proportion of U.S. output of goods and services, he said.

David C. Munro, chief U.S. economist at High Frequency Economics Ltd., said U.S. saber-rattling about the trade talks with Japan and the European Community "will set investors on edge this week or next."

Traders and analysts disagreed, however, on what effect a trade impasse with Japan would have on the value of the yen.

"The United States could start talking up the yen again if the trade talks don't go anywhere," Mr. Hutchinson said.

"If the United States imposes trade sanctions on Japan, trade flows will be diminished and Japan's exports will decline, which will hurt the yen," he added.

Meanwhile, the third-quarter U.S. gross domestic product report, to be released Thursday, "will put a good glow on the dollar," Mr. Hutchinson said. "The general bullish trend will continue for the balance of the year."

Mr. Johnson of Harris Bank said, "The dollar is flexing its muscles

because we are getting some better numbers on the economy."

Third-quarter GDP will show a rise of 2.5 percent to 3 percent, he predicted. The rise could accelerate in the final quarter to 3.5 percent, he added.

Mr. Munro said he expects 2.7 percent growth for the third quarter. "That will be thumbs up from 0.8 percent in the first quarter and 1.9 percent in the spring," he said.

Accelerating growth in the United States and falling rates in Europe will underpin the dollar, traders said.

The Bundesbank will lower its key interest rates by another half point by the end of the year, Mr. Johnson forecast.

He said Hans Tietmeyer, the Bundesbank's new president, "appears to be more sensitive to the needs of Europe."

After the Bundesbank eased its policy Thursday, central banks across Europe quickly followed with rate cuts of their own, designed to breathe some life into European economies.

On Friday, Ireland, Denmark, Spain and France followed the reductions a day earlier in Austria, Belgium, Italy, Switzerland and the Netherlands.