Blue Chips Up Slightly; Dollar Tumbles Again

Stocks ended slightly higher Wednesday after surging early in the day as bond yields tumbled, following the latest evidence that inflation has been vanquished.

Meanwhile, the dollar slumped again, and early today in Tokyo it was trading below 116 Japanese yen for the first time since Jan. 8.

On Wall Street, the Dow Jones industrials rose as much as 77 points in the first hour of trading, but finished with a gain of just 11.95 points at 7,286.16--about 7 points shy of Monday’s record.

It was the second straight day the Dow broke past 7,300 only to retreat by the close.

Broader market measures also faltered after an early jump. Still, the New York Stock Exchange composite index managed to hold just enough of a gain to close at a new high, as NYSE winners outnumbered losers by 15 to 10.

The Nasdaq composite added 1.96 points to 1,335.55.

Markets got an early lift from the government’s report that April’s producer price index--a key gauge of inflation at the wholesale level--posted its biggest drop in nearly four years, falling 0.6%.

Much of the enthusiasm behind the stock market’s speedy recovery from its March and April plunge has hinged on expectations that the Federal Reserve Board won’t boost short-term interest rates when it meets Tuesday, because inflation remains restrained even as the economy continues to grow.

The bond market appeared to be more convinced Wednesday that the Fed will leave rates alone next week: The yield on the benchmark 30-year Treasury bond fell as low as 6.85% before closing at 6.88%, down from 6.92% on Tuesday. The yield now is hovering at the lowest levels since early March.

“It’s clear the economy is not overheating,” said Scott Colbert, who manages $2.8 billion at Commerce Bank Investment Management in St. Louis. “This gives the Fed an opportunity to take a pass.”

Other analysts aren’t so sure--and that caution may be what’s pulling the stock market back from morning rallies this week.

“It’s kind of do or die now. We just made record highs, and there’s no way of knowing exactly what’s on the Fed’s mind,” said Rick Jandrain, investment chief for stocks at Banc One Investment Advisors in Columbus, Ohio.

The government today will report April consumer inflation.

Meanwhile, the dollar on Wednesday continued to give back its heady gains of recent months against the yen. In New York trading, the dollar fell to 117.20 yen, down 1.30 yen from Tuesday. However, the dollar edged up to 1.693 German marks from 1.692 on Tuesday.

Since May 5, the dollar has fallen about 8% versus the yen, its largest drop during such a period since September 1985. The decline reflects not only dimming expectations for higher U.S. interest rates, but also “jawboning” by Japanese government officials, who feared the yen was becoming too weak.

Among Wednesday’s highlights:

* Financial stocks rallied with bonds. Merrill Lynch gained 1 5/8 to 101 1/2, J.P. Morgan jumped 2 1/2 to 104 1/2, Wells Fargo shot up 5 5/8 to 285 1/8 and Citicorp gained 2 1/2 to 120 5/8.

* Many retail issues continued to gain in the wake of strong first-quarter earnings reports, reflecting healthy consumer spending. Federated Department Stores jumped 2 to a record 38 3/4, Woolworth rose 5/8 to 22 1/2, K mart gained 3/4 to 14 1/2, Sears added 1/2 to 49 7/8, American Stores gained 1 1/4 to 46 7/8 and Abercrombie & Fitch rose 1 1/4 to 17 1/4.

* Tech issues were mixed. Semiconductor manufacturing equipment maker Applied Materials surged 3 27/64 to 63 55/64. But a weak earnings forecast caused Micron Electronics to plunge 2 3/16 to 16 7/16.

* Many energy-related issues continued to advance, as oil prices remain firm. Noble Affiliates rose 1 5/8 to 42 1/2, Dresser Industries gained 1 3/8 to 32 7/8, Halliburton added 1 to 77 1/8 and Reading & Bates jumped 2 to 28 1/8.