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Sat, 12 Feb 2000, 1:05pm EST

Dollar Seen Struggling to Extend Gains Against Yen as U.S. Stocks Decline

By Mark Tannenbaum and Geraldine Ryerson-Cruz

Dollar Seen Struggling to Extend Gains Against Yen

New York, Feb. 12 (Bloomberg) -- The dollar is expected to reach new five-month highs against the yen next week on concern Japan's economy may be slowing, though the currency may struggle to sustain those gains if declines in U.S. stocks persist.

Traders are expected in the coming days to drive the dollar above the 110-yen level for the first time since September, extending at least briefly the dollar's 1.5 percent gain against the yen this week.

The dollar's rise has come on ``a reassessment of the Japanese economy,'' and on an expected slowdown in the flow of money from international investors into Japan, said Tomoko Iwakawa, a corporate foreign exchange adviser at Union Bank of California. The yen was hurt this week as Japanese officials said the economy likely shrank in the final quarter of 1999.

This week, the dollar rose to 108.84 yen from 107.19 yen a week ago, and yesterday climbed as high as 109.76, the strongest level since Sept. 10. Against the euro, the dollar slipped to 98.75 U.S. cents per euro, from 98.32 cents a week ago. The euro also rose compared to the yen, to 107.385 yen from 105.38 last Friday.

At week's end, though, the dollar lost ground against both the yen and the euro as all three major U.S. stock indexes tumbled about 2 percent, reducing demand for the U.S. currency.

Whither Stocks, Whither the Dollar

Keisuke Aso, manager of foreign exchange trading at the New York office of Bank of Tokyo-Mitsubishi Ltd., expects the dollar to trade in a range of about 107.50-110.50 yen next week. He expects the dollar to clear 110 yen at the start of the week, and beyond then he's ``not quite bullish'' on the dollar.

That's partly because of dropping U.S. stocks, Aso said. The Dow Jones Industrial Average has shed 10 percent since its Jan. 14 record close, and the broader Standard & Poor's 500 Index has fallen 5.6 percent so far this year. Only the Nasdaq Composite Index among the three major indexes is up, by 8 percent this year, even with yesterday's decline.

``In the longer-term trend, stock prices and the dollar normally go in the same direction,'' said Aso.

So far this year, the dollar has strengthened against the yen and euro as reports bolstered the view the U.S. economy is outpacing that in Japan and Europe, drawing investors here. Some statistics in Europe, in contrast, have fallen short of expectations.

The dollar rose to an all-time high against the euro of 96.65 cents on Jan. 31.

U.S. Reports Awaited

Next week, U.S. economic reports are expected to signal further growth without much of a pickup in inflation in January.

A report Tuesday is projected to show industrial production rose at a faster pace in January than the previous month, while producer and consumer price statistics on Thursday and Friday are expected to show prices were little changed.

``The weak numbers out of Europe have definitely weighed on the euro because people keep expecting the European growth rate to converge with that in the U.S.'' and have been disappointed, said Anjum Sayyed, a trader at Manufacturers & Traders Trust Co. in Buffalo.

Foreign exchange traders next week will also focus on French consumer price statistics for a gauge of the pace of inflation in the euro region's second-largest economy.

The euro got a boost Thursday after the European Central Bank warned inflation may be accelerating, suggesting officials are leaning towards raising interest rates soon.

Higher rates could bolster the euro by trimming the yield advantage U.S. debt enjoys over European debt with comparable maturities.

U.S. 10-year Treasury securities now yield about 101 basis points more than comparable maturity German government debt. That's about 12 basis points narrower than the average since the start of 1999.

``The end (of weakness in the euro) is very near,'' said Aso at Tokyo-Mitsubishi. The currency has potential to strengthen in the next 2-3 weeks, he said.

-- snooze button (alarmclock_2000@yahoo.com), February 12, 2000