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Bears on Dollar Are Confident They Will Prove Correct

July 8, 1987

NEW YORK (AP) _ The dollar’s recent upward rush has emboldened bullish traders, but several leading economists predicted Wednesday the U.S. currency will inevitably be dragged back down.

The dollar closed above 150 Japanese yen in New York Tuesday for the first time since March. The dollar turned in a mixed performance Wednesday but managed another gain against the yen, closing at 150.49 in New York.

The dollar’s recent strength, if it persisted, would be bad news for the U.S. trade deficit because it would once again make U.S. exports more expensive in foreign markets and imports cheaper in the United States.

Investment analysts who hope to make money by trading on a strengthening dollar predicted the currency could rise another 10 percent or so against the Japanese yen and European currencies in coming months.

″The dollar is (still) too low,″ said Peter Canelo, an investment strategist for Bear, Stearns & Co. and a leader of the dollar bulls.

″We’ve been saying for some time we thought the dollar was going to start heading higher,″ agreed Mike Dallow, a currency market analyst for Dean Witter Reynolds Inc. in Chicago.

But several other economists who have watched the dollar bump steadily downward since early 1985 argued that the current rise is temporary and the dollar has farther to fall - perhaps much farther.

A principal reason for the dollar’s rise is that foreign investors have been buying dollars so they can invest in the U.S. stock and bond markets to take advantage of higher yields here.

Ordinarily foreign investors would be nervous that their gains from higher yields in the United States would be offset by losses from a decline of the dollar against their home currencies. But that fear has been eased by statements from U.S. officials that the dollar should not fall further.

″There is no puzzle in what’s happening,″ said Rudiger Dornbusch, an economist at Massachusetts Institute of Technology. ″If the Treasury secretary promises that ‘I won’t make the dollar go down,’ it’s a one-way street until further notice.

″It’s a monument to the stupidity of our policy in defending an overvalued dollar, driving it up, and it cannot last,″ Dornbusch said, predicting the dollar will fall to 100 yen, probably within two years.

Wynn Bussmann, an economist for Chrysler Corp., predicted the dollar might hit 100 yen by the end of 1988.

Even if the dollar gets down to 100 yen by 1992, it will only prevent an increase in the United States’ $34 billion trade deficit with Japan in cars, trucks and parts, Bussmann said. To shrink the auto deficit - the biggest single component in the overall trade deficit - would require an even lower dollar, he said.

″I think this rise (in the dollar) is temporary,″ agreed George Eads, chief economist at General Motors Corp. ″The fundamental relationship suggests that it should depreciate a bit more. I’m not all that concerned about this particular shift.″

Although the merchandise trade deficit is beginning to shrink, it promises to remain above $100 billion a year for several years to come. And since trade in services is also swinging into the red, the United States will keep falling deeper into debt to the rest of the world for years to come.

Since foreigners will eventually tire of increasing their loans and direct investments here, the United States will have to pay its way by turning its trade deficits into surpluses, and that will require a more competitively valued dollar, Dornbusch and others said.

Dollar bulls such as Dallow reject that view. Dallow said there is no clear correlation between trade deficits and exchange rates. As long as yields on U.S. securities remain attractive, foreign money will continue to come in and prop the dollar up, Dallow said.

In a way, both bulls and bears may be correct, said Lawrence Kreicher, an international bond analyst at Merrill Lynch Capital Markets. In the short run, the dollar may head higher because of the flight of capital from Japan and other factors, but in the long run the trade deficit is likely to force the dollar lower, Kreicher said.

The Japanese economy is not suffering as badly from the strong yen as was once feared, Kreicher said. Therefore, he said, the United States may feel free to allow the dollar to decline to improve the trade deficit without having to worry so much about its international repercussions.

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