Greenback’s Stability Is Puzzler of Foreign Exchange : Currency: Dealers see many reasons for the dollar’s value to fluctuate. Instead they are faced with sluggishness.

These are nervous times for foreign exchange dealers Chris Manno and Stephen Flanagan.

Sitting before blinking computer screens amid the trading room cacophony, the two PaineWebber currency traders say they are perplexed by the dollar’s sluggishness, given the volatility of the stock and bond markets in the last few months.

“We’re not the only ones scratching our heads over why the dollar hasn’t reacted lately,” said Flanagan, who joined PaineWebber last fall and has been a currency trader for 11 years. “It has become apparent that the dollar has become completely divorced from fundamentals.”

The Dow Jones industrial average has slumped 7% since it reached an all-time high on Jan. 31, although it has rallied in recent sessions. Bond prices have been pummeled the last few months, and the yield of the Treasury’s 30-year bond has risen to the highest level of the Clinton Administration. But bonds have also recovered recently.

Yet the dollar has languished, trading in narrow ranges against the Japanese yen and German mark, although events in those nations might have moved the foreign exchange markets at other times.

Manno, like Flanagan, specializes in dollar-yen trading. He said the dollar should also be reacting to trends in other markets.

“There are so many factors that can affect currency trading,” said Manno, who is chief spot dealer at PaineWebber. “ . . . political news, economic news, foreign, rumors and sentiment--any one of them can move the market, but lately none of them have been.”

In Japan, political gridlock has stalled efforts to reconvene trade talks with the United States. Hata faces the prospect of ruling without a majority in Parliament, yet the dollar has hovered between 102.5 and 105 yen since Prime Minister Morihiro Hosokawa resigned April 8.

Win Thin, an international economist with MCM Currencywatch Inc., said the market’s perception of a lack of progress on U.S.-Japanese trade issues will continue to hamper the dollar. “Market sentiment isn’t easy to change,” he said.

In Germany, meanwhile, the central bank has lowered interest rates, an action that usually bolsters the dollar because lower foreign rates make U.S. investments more attractive. The dollar has been stalled between 1.67 and 1.72 marks for the past month.

“It’s a very frustrating market, so it’s hard to make money right now,” said Margaret Koudaraskas, foreign exchange technical analyst at Technical Data, a financial research firm in Boston. “Any rise in the dollar relative to other currencies brings immediate selling, to lock in profits. And investors remain timid on dollar buying, because of a lingering concern over stock market corrections and bond interest rates moving higher.”

“Every rally is undermined before it really gets going,” she said.

William Sterling, manager of international economics at Merrill Lynch & Co., said negative publicity about hedge funds and derivatives has also affected currency markets.

Derivatives are investments tied to the performances of underlying stocks, bonds and currencies. They are a way of hedging, or offsetting, sharp market fluctuations. Also, hedge funds can borrow large amounts of money.

Some companies and fund managers took big losses when their currency or bond holdings dropped in value relative to the interest they were paying on debt. They were forced to sell, further eroding their holdings and the market.

Now, as regulators pressure banks and brokerages to divulge details about their holdings in derivatives and hedge funds, there is less speculative cash flowing into the currency markets, Sterling said. “Many traders have been sitting on the sidelines waiting for the market to sort itself out,” he said.

Meanwhile, U.S. interest rates have been rising. Analysts are surprised that the dollar has not reacted significantly to the combination of rising U.S. rates and falling German rates.