MARKET consensus is for a stronger US dollar early this year with dealers set to bid the unit up as soon as trade begins tomorrow. The story underwriting the dollar, however, is the same old one of economic recovery in the US and lower interest rates in Germany. The dollar is now trading at around 1.61 marks and 1.46 Swiss francs, a significant improvement from its position a little over three months ago when it was below 1.40 marks and 1.26 Swiss francs. So what has changed in favour of the US currency? For a start the US presidential election is over. Mr Bill Clinton's campaign promises to champion the American economy have convinced the market that business activity will gather momentum leading to both higher inflation and interest rates within the next two months. A string of positive US data releases have also helped to fuel expectations. However, by far the most important factor for the dollar this year is completely outside the control of American officials. A recent statement by Mr Helmut Schlesinger, the Bundesbank president, that long- term interest rates could retreat to six per cent this year if inflation abates have raised hopes of a cut within the first three months of the year. Economic conditions clearly warrant a reduction. How far can the dollar go? We believe that depends on the Bundesbank, but 1.65 to 1.68 marks and 1.48 to 1.52 Swiss francs is achievable during the first quarter. It is also likely that the currency markets will pressure the French franc again. In fact, the European exchange rate mechanism (ERM) could be the first target when traders return to work tomorrow. If this is the case, dollar investors will still benefit. The yen is more difficult to predict. At present, the market is looking to the Bank of Japan to cut the official discount rate again. Economic activity is sluggish and domestic demand is weak. The one thing in favour of the currency is the current account position. Japan's positive trade balance is projected to rise further this year. Therefore, although we anticipate that the yen will weaken against the dollar, we do not expect this to be as marked as the European currencies. On the crosses, the mark should strengthen against the Swiss franc during the year because interest rates are expected to fall more quickly in Switzerland. The mark will not fare as well against the yen which will rise on shrinking interest rate differentials. Sterling looks destined to soften against the American currency, probably falling towards 1.45 but to harden opposite its European counterparts. The rationale behind this thinking is that interest rates have already fallen in Britain, consequently the economy has a head start in the recovery race. The Canadian and Aussie units have little chance of significant appreciation. More interesting currency opportunities are likely to exist in Europe and the US this year. Pauline Gately is head of research at BNP International Financial Services.