SINGAPORE -- The dollar will weaken to 100 Japanese yen or lower in the next year to 18 months, a former U.S. presidential economic advisor said Thursday.

U.S. domestic private investment is too small to sustain the country's growing current-account deficit without a weaker dollar, while U.S. inflation is higher than it is in Japan or most of Europe, the U.S.'s major trading partners, said Martin Feldstein.

Feldstein, a Harvard University professor, was chief economic advisor to President Ronald Reagan from 1982 to 1984 and is currently president of the National Bureau of Economic Research, a U.S think tank.

'I see the dollar at a 100 yen or less in the next 12 to 18 months,' Feldstein said at a lunchtime presentation.

Feldstein said the dollar has risen faster in the past 18 months than fundamental economic factors warrant. Recent indications from Japan's Ministry of Finance suggest the goverment believes the yen's decline is over.

A further factor favoring medium-term dollar weakness is that the Bank of Japan is likely to raise interest rates some time in 1997 once economic recovery gathers speed.

The dollar may remain firmer against the Deutsche mark next year amid uncertainty surrounding the creation of a single European currency, with mark weakness putting upward pressure on the Swiss franc.

But economic and monetary union in Europe, with the establishment of a European central bank committed to price stability, is 'a virtual sure thing', Feldstein said. The dollar is likely to dip from 1.55 marks to 1.40 marks from 1998 onwards.

U.S. economic recovery is neverthless robust, and inflationary pressures will prompt tighter monetary policy next year. Feldstein argued the U.S. Federal Reserve will nudge interest rates higher to 6% to 6.5% by the end of next year from the current 5.25% Federal funds rate.

Feldstein said the Federal Reserve is taking a 'wait-and-see attitude' on whether a natural 'aging' of the current U.S. economic upswing will temper inflation, or a further decline in unemployment will trigger fresh inflationary pressures.

But with the Federal Reserve intent on reducing inflation from around 3% towards 2%, 'the (medium-term) implications for long-term bonds is pretty clear ... we'll see the 10-year bond down under 5%,' Feldstein said.

Feldstein also said that likely U.S. economic policy developments in 1997, and for the rest of President Bill Clinton's second term in office, will be good for U.S. financial markets and U.S. Treasurys in particular.

'I do think we will see a budget deficit close to 1% of GDP by the end of the decade,' Feldstein said. 'That's something financial markets certainly aren't expecting,' he said, noting it as another force putting downward pressure on the U.S. dollar.

The budget deficit will decline as the Clinton administration implements modest tax cuts in the form of targeted tax credits, dictated by bipartisan policy-making with the Republican-led U.S. Congress.

Growing consensus that U.S. consumer price inflation has been overestimated by around 1% a year is likely to see legislation governing CPI-linked welfare payments and tax bracketing modified to take in lower real inflation levels, reducing U.S. government spending in the process.

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