Stabilizing Dollar Helps Stocks; Dow Gains 48.56 : Markets: Traders also respond to a drop in commodity prices and interest rates. But some analysts see a ‘flash rally.’

Blue-chip stocks closed sharply higher Monday while bond yields fell, sparked by a stabilization in the dollar and by falling commodity prices and interest rates.

The Dow Jones industrial average rose 48.56 points to 3,685.50, partially offsetting last week’s declines.

But some analysts suggested that the rebound could be short-lived. They cited among bearish factors the possibility that the Federal Reserve will hike short-term interest rates again in an effort to make the dollar more attractive. They also suggested that Monday’s rally was merely a reaction to a temporarily oversold market.

“It’s a flash rally,” said Douglas Kass, director of institutional equities at JW Charles Securities.

As the stock market opened, the Dow dropped about 25 points in response to the dollar’s slide in Tokyo to its first close below 100 Japanese yen since World War II. Last week, the Dow industrials fell about 140 points over the five trading days amid concern that a weak dollar could bring inflation and higher interest rates.

But share prices recovered Monday, inching into positive territory and then moving sharply higher as first commodity prices fell, bond prices reversed course, then the dollar recovered from its lows against the yen and the German mark.

Analysts said relative stability in the dollar encouraged investors to buy stocks. Last week, fears that a dollar rescue effort by the Fed might include another rise in interest rates drove the stock market sharply lower.

Mostly, investors began to recognize that the dollar’s plight might not be as serious as initially believed, said Alfred Goldman, director of technical market analysis, with A.G. Edwards & Sons.

“The stock market has been hammered by major media hype about the dollar,” Goldman said.

A weak dollar makes imports more expensive, and that can signal inflation. In addition, there is the concern that foreign investors will sell out of U.S. markets in search of better returns elsewhere.

Meanwhile, falling commodity prices helped reinforce the sentiment that inflation is not presently an issue, analysts said. Commodities are often considered hedges against inflation.

The Knight Ridder Commodity Research Bureau’s index of 21 futures contracts fell 2.21 to 227.77, largely on the heels of losses in grains and precious metals.

Gold fell $6.40 an ounce to $384.70 on the New York Comex.

The drop in the CRB, considered by some an inflation barometer, touched off a retreat in Treasury bond yields, traders said.

Bond yields, which rose in early trading, reversed course later in the day, pushing up bond prices, which move in the opposite direction.

The bellwether 30-year bond’s yield fell to 7.45% from 7.52% on Friday, while its price rose 23/32 point, or $7.19 per $1,000 in face value.

The decline in the long-bond’s yield was the first in three trading sessions. But market players cautioned that trading was light and that the recent bearishness among bond investors was far from over.

Meanwhile, investors were in the market shopping for stocks hammered last week, analysts said. Among the most sought-after were the technology issues and those of companies whose fate is closely tied to the economic cycles, such as autos and chemicals.

Stock traders concentrated on large capitalization companies, including auto makers and other economically sensitive cyclical stocks.

The recently battered Nasdaq composite index of mostly smaller company issues jumped 8.89 points to 702.68.

Still, in the broader market, advancing issues narrowly outnumbered decliners on the New York Stock Exchange, with 250.11 million shares changing hands.

Among other major market indicators, the Standard & Poor’s index of 500 stocks rose 4.51 to 447.31, while the NYSE’s composite index rose 1.90 to 246.45.

Among the market highlights on Monday:

* Microsoft led the Nasdaq most-active list, up 2 3/8 to 51 7/8, followed by Oracle Systems, up 1 1/8 to 37 3/4.

* Auto stocks helped fuel the market’s upturn. General Motors climbed 1 5/8 to 52 1/4, Ford jumped 2 to 58 3/4 and Chrysler gained 1 1/8 to 47 3/4.

* Kemper slipped 1/4 to 61 1/8 and Conseco fell 5/8 to 48 5/8 after the two signed a merger pact under which Kemper shareholders will receive $67 a share in cash and Conseco stock.

* Walt Disney rose 1 1/8 to 43 1/8. Alex. Brown & Sons upgraded the stock to strong buy from buy, citing the strength of its new “The Lion King” movie.

* Carter-Wallace Inc. fell 7/8 to 16 1/2. The company complied with a 1993 government order to stop selling its Organidin drug for lung ailments following studies that suggest the medicine causes cancer in rats.

* Somatogen Inc. surged 2 3/4 to 9 1/2. Eli Lilly & Co. plans to manufacture Somatogen’s recombinant DNA-produced blood substitute under a joint venture agreement. Lilly rose 3/4 to 57 7/8.

Mexico City’s Bolsa index ended with a gain of 51.92 points at 2,239.19.