Go for it!
If you already have an 18" rim with the correct number of holes, then I say just go for it. 18" front and rear will work fine. There are plenty of excellent bias ply tires these days, you don't need expensive 17" wheels, with silly-sticky tires, to have a kick-ass backroads toy. I'd recommend sliding the forks down in the triples to be flush with the top of the triples and swap in a stiffer set of fork springs. If you can find a spare shock, have a suspension guru revalve it and/or swap in a stiffer spring. Add a set of Race-Tech cartridge emulators in the forks and you have a very capable sportbike. We roadraced similarly set-up dirt bikes for years...
Here is a photo of my '92 XT600E faux Motard; shown with a stock-sized, skinney 17" rear and skinney 18" front rim. The tires are Bridgestone BT-45 on the rear (120/80-17) and an ancient Metzeler Lazer (90/90-18) in the front - not the stickiest bias ply tires but it still will rail thru the corners. Totally stock suspension. It kicks ass...
I've since gone to a 19" front which came to me with another XT. I prefer the 19" slightly on this bike since I feel like there is more feedback than with the 18". Keep in mind my '92 has slightly different geometry than your '89 and also a 17" rear.
I've never needed a steering stabilizer on this bike, but YMMV. Carefull tire selection makes a big difference, since some tires are more prone to instability than others. You actually will probably prefer a rounder, slower steering front tire, since it will turn so much quicker than with the stock 21". Good luck!
Last edited by joefj1200; 8 Jun 2008 at 16:45.