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IS DOLLAR'S RALLY A MIXED BLESSING?

Investors in the U.S. stock market have watched with mixed feelings lately as the dollar has staged a rally against leading foreign currencies.

Most analysts agreed that the dollar was overdue for a rebound of some sort after taking a prolonged slide to new post-World War II lows against the Japanese yen and German mark.Many observers were especially encouraged, and relieved, to see the dollar rally from an exchange rate of just over 80 yen to more than 95 yen in recent weeks.

At the same time, however, the revival of the U.S. currency seems to have contributed to a flattening out of the Dow Jones industrial average, by clouding earnings expectations for many blue chip in-ter-na-tional companies based in this country.

"For the time being, the dollar-yen price, and to a lesser extent the dollar-mark, is the most important price in the world," declared Barton Biggs, global investment strategist at Morgan Stanley & Co.

The relentless rise of the yen against the dollar was widely seen as a peril to the world financial system because it complicated serious economic problems in Japan, making Japanese goods more and more expensive to customers in other countries.

If Japan's recession kept worsening, many observers worried, it could lead to a banking crisis in that country with shock effects that would be felt far and wide.

"We were concerned that the ongoing deflation in Japan was not being forcefully addressed," said Eric Miller, chief investment officer at Donaldson, Lufkin & Jenrette Inc.

But the Bank of Japan, and central banks in other financial capitals, have intervened aggressively to support the dollar since trouble erupted at a big Japanese credit union.

"The timing could not have been better," said Michael Aho at Prudential Securities. "Market sentiment was beginning to change in the dollar's favor. So the joint intervention was like pushing on an open door."

In Biggs's eyes, "I believe this reversal truly is a turn in the tide. A gradual rise in the dollar and a fall in the yen are very bullish because this will revive the Japanese economy, end deflation and reduce the risk of the Japanese banking system collapsing."

Unhappily for owners of U.S. blue chips, however, the initial market impact of these developments seems to have been to divert money away from this group of stocks, which had been thriving during the dollar's slump.

A falling dollar helped these companies' earnings by increasing the dollar value of profits from their extensive overseas oper-a-tions.

Conversely, "a stronger dollar will depress corporate profits," said Edward Yardeni, chief economist at Deutsche Morgan Grenfell C.J. Lawrence in New York.

At the same time, the perceived benefits to Japanese and European companies have perked up investors' interest in those stock markets rather than Wall Street.

"For the next six months, I expect the action will be in the Asian equity markets rather than in U.S. stocks and bonds," Biggs said.

Nonetheless, some observers argue that the negative effects of a turn in the dollar shouldn't be exaggerated in comparison to their positive implications for the world economy.

Furthermore, they say, the big competitive gains racked up by U.S. industries in world markets over the past several years aren't going to be erased overnight.

Recent exchange rates for the dollar "are still below those that prevailed at the beginning of the year and are far below the rates at the beginning of 1993 and 1994," said Aho.

"Despite the recent rise in the dollar, U.S. firms still enjoy an enhanced competitive advantage over their rivals in Japan and Germany."