Fed Buys Up Dollars After Yen Hits Record : Markets: The strong show of support lifts currency, but stocks and bonds fail to rally. The Dow industrials lose 26.

From Times Staff and Wire Services

The Federal Reserve Bank of New York bought at least a billion dollars in currency markets Wednesday, driving the dollar up from a fresh post-World War II low against the Japanese yen and sharply higher against key European currencies as well.

But the central bank's aggressive defense of the beleaguered dollar, at the apparent behest of the Clinton Administration, did little for stock and bond markets. Long-term Treasury bond yields hit new 2 1/2-year highs, and the Dow Jones industrial average tumbled 26.24 points to 3,837.13, its lowest since Oct. 10.

The Fed's surprising intervention forced some traders who were "shorting" the dollar--that is, betting on its continued decline--to cover their bets by rushing into the market and buying the currency.

Dealers described the Fed's dollar buying as an unusually strong move aimed at sending a signal to speculators who may be trying to drive the currency still lower.

In New York, the dollar was trading at an all-time intraday low of 96.10 Japanese yen early Wednesday when the Fed stepped in. By the close of trading, the dollar had rallied to 97.60 yen, up from 96.65 on Tuesday. Tokyo markets are closed today.

The dollar also shot up to 1.514 German marks from 1.495 on Tuesday.

Wednesday's Fed move marks the fourth time this year that the United States has intervened in the open market to purchase dollars. The latest effort met with much greater success than the last attempt June 24, when the United States joined in a massive intervention with 16 other nations, only to see the dollar fall anyway.

In contrast to the earlier failed rescue efforts, the move Wednesday was accompanied by strong words of support from the Clinton Administration and hints of even more aggressive efforts if traders don't stop battering the greenback.

Treasury Secretary Lloyd Bentsen released a statement calling the dollar's recent slide "inconsistent" with the healthy U.S. economy.

The Fed, the Administration and many economists have been baffled by the dollar's long slide this year, at a time when the U.S. economy has been growing briskly and interest rates have been rising--developments that in theory should bolster the buck.

As recently as Aug. 31, a dollar bought 100.18 yen and 1.582 marks.

But some Wall Streeters say the dollar's weakness isn't such a mystery, noting foreign investors' supposed lack of confidence in the Administration and worries about rising inflation in the U.S. economy in 1995.

Indeed, the latest dollar selloff, which began Tuesday, was sparked by another round of bullish economic reports that hinted at higher inflation ahead.

On Wednesday, the Fed's own "beige book" report on regional economic conditions sounded an inflation alarm, saying prices of raw and semi-finished materials are continuing to accelerate.

Generally, expectations of higher inflation in an economy tend to discourage investment there, especially by foreign investors.

Inflation fears continued to gnaw at the bond market Wednesday, sending yields higher across the board. The yield on the Treasury's bellwether 30-year bond closed at 8.09%, a new 2 1/2-year high.

The stock market tried to rally at midday as the dollar rebounded, but the market's gains were short-lived.

On the New York Stock Exchange, falling stocks outnumbered winners by more than 4 to 3 in heavy trading.

Smaller stocks showed more resilience. Losers edged winners by a narrow 15-14 margin on the Nasdaq market, and the Russell 2,000 index of smaller stocks edged up 0.27 point to 253.75.

Still, "as long as bond yields stay in this area, it's going to be very difficult to mount a (stock) rally," said Peter Canelo, market strategist at NatWest Securities.

Among Wednesday's highlights:

* The Dow was hammered mostly by profit taking in Alcoa, which fell 1 3/8 to 82 7/8, and DuPont, which dropped 2 1/8 to 55 3/4. Hearings began this week on a $520-million suit over a DuPont fungicide by Caribbean farmers.

* GM also hurt the Dow, as it fell to a new 1994 low of 38 1/4, down 1/2.

* The Nasdaq market was helped by strength in many tech issues. Some semiconductor stocks rose after brokerage Goldman Sachs upgraded Cypress Semiconductor, citing good demand prospects for certain computer chips. Cypress jumped 1 5/8 to 22 3/8. Overseas, Tokyo's 225-share Nikkei average fell 165.83 points to 19,750.65. Frankfurt's DAX index fell 27.38 points to 2,042.35, and London's FTSE 100 index eased 15.0 points to 3,081.3.

* THE ECONOMY: Fed warning on inflation points to a new interest rate hike. D3

Weak Greenback

The dollar has dropped steadily since January. Monthly closes, except latest, in yen:

Wednesday: 97.60

Source: TradeLine

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