MARKET WELCOMES LOWER AUSTRALIAN PAYMENTS DEFICIT The Australian dollar rose more than 40 points and money market interest rates retreated on the better than expected improvement in the February current account deficit, but economists and dealers were cautious about identifying it as the start of a downward trend. The current account deficit narrowed to 750 mln dlrs in February from 1.23 billion in January. It hit 13.82 billion dlrs in 1985/86 to end-June. The currency jumped to 0.6858/63 U.S. Dlrs and traded as high as 0.6875 before retreating to around 0.6864/69. "It's got 69 cents written all over it," one dealer said. Foreign exchange dealers said some buyers had gone long on the dollar expecting a lower figure and sold it down about 30 points to 0.6820 U.S. Dlrs before the release. The 750 mln dlr deficit was at the lower end of forecasts and analysts said the market would welcome any figure below one billion dlrs for March. Banque National de Paris <BNPP.A> senior dealer Peter Nicolls cautioned that in the long term the currency and interest rates were too high for import substitution and export industries. Nicolls said he expected the dollar to go as high as 0.6875 and perhaps to 69 cents tomorrow. <Lloyds Bank NZA Ltd> chief economist Will Buttrose said the 42 mln dlr trade surplus was encouraging as were imports at 2.77 billion dlrs, down from 2.99 billion in January. But he warned that the outlook for rural and iron and coal exports remained poor. "We should remember we are paying something like seven to eight billion dollars simply to service our foreign debt and that is not going to go away in the near term," Buttrose said. Buttrose said he expected a March deficit of around 900 mln dlrs, and added "Any figure under a billion dollars will be acceptable (to the markets)." ANZ Banking Group Ltd <ANZA.S> senior economist Ian Little said the big question was whether the improvement in exports could be sustained. February FOB exports rose to 2.82 billion dlrs from a revised 2.74 billion in January. Interest rates responded quickly to the deficit news, with 90-day bank bill yields falling to 16.42-16.45 pct from early highs of 16.50 and yields yesterday as high as 16.65. Longer term yields fell with 10-year bonds at 13.66/68 pct from 13.74 before the release and highs of 13.87 yesterday. The stock market was easier at midsession but brokers said the current account data had little impact on trading.