All-Out Trade War Not in the Cards : Markets: The dollar plunges to six-month low against the yen, sending the Nikkei stock average into a tailspin.

The dollar plunged to nearly six-month lows against the Japanese yen in U.S. trading Monday as investors feared that the Clinton Administration would drive the dollar lower against the yen in retaliation for the breakdown of trade talks intended to ease the nearly $60-billion U.S. trade deficit with Japan.

The strengthening yen and the threat of U.S. trade sanctions continued to send Japanese shares spiraling downward. In early trading today, the Nikkei 225-share average was down 647.47 points to 18,811.78. On Monday, the Nikkei closed off 531.45 at 19,459.25.

A strong yen tends to spur U.S. exports to Japan by making them less costly, while raising the price of Japanese products in the United States. The strategy has been used in the past as a way to correct the huge Japanese trade surplus.

On Wall Street, blue-chip stocks settled with modest gains after a rise in long-term interest rates cut into the market’s initial advance of more than 20 points.

The dollar started skidding against the yen in early trading in Tokyo, although the Japanese central bank bought dollars to support the U.S. currency, according to Amy Smith, senior currency strategist at the IDEA analysts service.

The dollar closed in New York at 102.65 Japanese yen, down from 107.20 yen Friday. At one point in New York trading, the greenback fell to an intraday low of 101.00 yen, a level not seen since Aug. 17, the day the dollar hit a post-World II low of 100.40 yen.

But dealers said they see the dollar testing that level soon because the Clinton Administration has shown no sign it is unhappy with the dollar’s fall.

The dollar has dropped 6% since President Clinton announced last Friday that top-level U.S.-Japan trade talks had ended without an agreement, setting the stage for possible U.S. trade retaliation against Japan.

On Monday, the President refused to rule out a possible all-out trade war with Japan, although he said he would take “some days” to mull the full range of options before imposing sanctions on Tokyo.

Despite denials by U.S. officials that the White House has plans for a campaign to promote a stronger yen, many traders interpreted Clinton’s statements as indicating such tactics would be used.

Stocks

Stocks ended mixed in choppy trading as investors also worried about a trade war between Japan and the United States.

The Dow Jones average rose 9.28 points to 3,904.06, and advancing issues narrowly outnumbered declines on the New York Stock Exchange.

But the NYSE’s composite index lost 0.05 to 261.26, while at the American Stock Exchange, the market value index fell 2.32 to 474.91. Among other major market indicators, the Nasdaq composite index rose 4.06 to 785.45.

Big Board volume came to a moderate 263.19 million shares, up from 213.74 million in the previous session, which was cut short by Friday’s severe winter storm in New York.

Stocks swung between positive and negative territory, with an early sharp advance of more than 25 points evaporating as the dollar’s decline intensified and as bond yields turned decidedly higher, pushing down prices.

Stocks ended mostly lower in Europe. In London, the Financial Times 100-share average ended down 15.4 points at 3,363.5, while Frankfurt’s DAX-30 average closed at 2,116.01, up 1.21% or 25.4 points. Stocks also fell in Paris and Zurich.

Mexico City’s Bolsa index closed 23.23 points lower at 2,778.83.

Among the market highlights:

* QVC Network gained 1 5/8 to 48 1/2 amid speculation that rival Viacom had won the protracted bidding war for Paramount Communications. Viacom class A fell 1 5/8 to 34 7/8, and Viacom class B dropped 1 3/4 to 29 7/8. Paramount closed down 3/4 to 76 1/8.

* Among gainers, General Motors rose 5/8 to 61 3/4, Chrysler added 3/4 to 59 3/4 and Ford Motor was up 1/4 to 65 3/4. The auto makers rebounded from a bout of profit taking last week.

* Other strong cyclicals were Whirlpool, which rose 2 1/2 to 70 1/2, and Caterpillar, up 7/8 to 106.

* Compaq Computer gained 7/8 to 91 5/8, and IBM ended up 3/4 to 54.

* Summit Technology fell 4 3/4 to 31 3/4 after CNBC commentator Dan Dorfman made negative comments about the company’s Excimer laser system for the treatment of nearsightedness.

* Columbia/HCA Healthcare gained 1 1/8 to 39 3/4. Columbia Healthcare and HCA--Hospital Corp. of America--completed their merger last week.

* WMX Technologies gained 1/8 to 24 7/8 after prosecutors in California said they wouldn’t appeal a decision last week dismissing theft charges against a WMX Technologies unit and eight employees.

Credit

Long-term Treasury bond yields rose on fears that the dollar’s plunge against the Japanese yen would prompt foreign investors to sell U.S. bonds.

The long bond’s yield rose to 6.45% from 6.40% on Friday. Its price, which moves in the opposite direction, fell 9/16 point, or $5.63 per $1,000 in face value.

But prices of shorter-term maturities barely budged. Short-term Treasuries ranged from unchanged to 1/32 point higher, while intermediate maturities were unchanged to 1/8 point lower, the Telerate Inc. financial information service reported.

Prospects for a weakening dollar sparked fears that Japanese investors would dump dollar-denominated securities to cut exchange rate losses, prompting a selloff in bonds.

Fears of a selloff by overseas investors spread as the dollar slid against the yen.

“In the past, when that happens, a lot of investors get scared and bail out of Treasuries,” said Anthony Chan, an economist at Barclays de Zoete Wedd Government Securities Inc.

Analysts said there was little indication that Japanese investors were selling off their holdings of Treasury securities. But many U.S. traders sold in anticipation of that scenario.

A report from the Federal Reserve Bank of Atlanta on regional economic conditions also prompted some bond selling, Chan said. The survey showed a surge in production by manufacturers who expected to raise prices in January.

While regional in scope, the report was viewed as an indicator of national business conditions and may have focused attention on the timing of the Federal Reserve’s next move to raise short-term interest rates, Chan said.

In other markets:

Gold for current delivery closed at $383.90 an ounce on the New York Comex, up $3.90 from Monday, while silver for current delivery closed at $5.343 an ounce, up 9.5 cents.

Elsewhere, warming sunshine spread from the East Coast to the Midwest Monday, pushed March crude oil down 59 cents to a seven-week low of $14.13 a barrel.