FINANCIAL MARKETS : Profit Taking Clips Stocks as Dollar Falls and Yields Rise

Blue-chip stocks snapped a four-day winning streak Wednesday, hurt by year-end profit taking, a drop in the dollar and a jump in long-term bond yields.

The Dow Jones industrials fell 22.20 points to 3,839.49 after rising 94 points over the previous four sessions.

Meanwhile, U.S.-traded Mexican stocks rebounded sharply after Tuesday’s selloff, though analysts say the outlook for the Mexican market remains troubled.

On Wall Street, U.S. stock and bond markets were unnerved by a sudden slump in the dollar, which fell amid speculation that Mexico may have drawn on multibillion-dollar lines of credit extended by the United States and Canada last week to halt the peso’s slide.

By swapping pesos for dollars, Mexico would in effect shrink the supply of pesos--boosting their value--while creating a new supply of dollars in the market, thereby depressing the dollar’s value.

As traders sold dollars on those supply worries Wednesday, the dollar fell to 1.544 German marks in New York, down from 1.576 on Tuesday. It also fell to 99.20 Japanese yen from 100.34.

But after trading had largely ended, a U.S. Treasury official denied that Mexico had tapped its dollar account with the United States. Nonetheless, the peso rebounded in value Wednesday, to about 4.98 to the dollar from 5.50 on Tuesday.

The U.S. bond market bore the brunt of the dollar’s decline. Long-term bond yields have been falling in recent weeks, helped by signs of slowing economic growth and by expectations that foreign investors may find U.S. securities more attractive in 1995.

A new decline in the dollar would revive inflation worries (by threatening higher prices on imports) and would discourage foreign investment, either of which would be negative for bonds.

The 30-year U.S. Treasury bond yield, which sank to a three-month low of 7.76% on Tuesday, jumped to 7.83% by Wednesday’s close.

But yields on very short-term securities tumbled, which some traders said reflected a continuing “flight to quality” by nervous investors. The three-month T-bill yield dove to 5.61% from 5.78% on Tuesday.

In the stock market, the broad market followed the Dow lower. Declining issues outnumbered advancing ones nearly 3 to 2 on the New York Stock Exchange, though volume continued to be moderate.

Analysts said clearer signs of the market’s next big move--up or down--won’t be visible until next week, after tax-related year-end trading games are finished.

Among Wednesday’s highlights:

* U.S.-traded Mexican issues followed the Mexico City market higher after Tuesday’s slide. In Mexico City, the Bolsa index gained 60.82 points, or 2.7%, to 2,337.72.

On the NYSE, Telmex surged 3 3/4 to 41 1/2, Vitro leaped 2 1/8 to 13 1/2, Empresas ICA gained 5/8 to 16 3/8 and Coca-Cola Femsa jumped 1 5/8 to 22 5/8. The Mexico Fund shot up 2 1/4 to 22 1/4.

* Other Latin markets were mixed. In Sao Paulo, Brazil, the Bovespa index rebounded 2% to close at 41,953, but Argentina’s Merval index eased 0.1% to 436.97 and Chile’s IPSA index tumbled 1.3% to 140.49.

* On Wall Street, retail-related stocks led the market decline on disappointment over Christmas sales.

Toys R Us plunged 3 to 30 1/8 after a delayed opening, following reports that investment firm Wertheim Schroder & Co. had lowered its earnings estimates. Toys R Us declined to comment on its Christmas sales.

AnnTaylor fell 2 1/4 to 31 7/8 after Montgomery Securities said the apparel retailer might not meet its fourth-quarter profit goals.

Other retail stocks falling included Dayton Hudson, off 1 1/2 at 67 3/8; Sears, down 5/8 at 45 1/8, and Strouds, off 3/4 at 11.

* Auto stocks also came under renewed pressure. Ford fell 1/2 to 27 1/4, Chrysler fell 3/4 to 48 3/8 and GM eased 5/8 to 41 1/4.

* Some tech issues were hit by profit taking. Computer Sciences lost 1 5/8 to 50 1/4, Lotus dropped 1/2 to 39 1/2, Autodesk gave up 1 to 39 3/4 and IBM fell 1 1/4 to 73.

* Gold stocks bucked the market trend as bullion prices rose, benefiting in part from the weaker dollar.

Near-term gold futures on the Comex gained $2.10 to $383.70 an ounce, and silver futures jumped 10.5 cents to $4.88 an ounce.

Among gold miners, Santa Fe Pacific Gold rose 1/2 to 13 1/4, American Barrick added 7/8 to 22 5/8 and Placer Dome jumped 1 1/8 to 22.

Among other foreign markets, London’s FTSE-100 index added 12.4 points to 3,095.8 while Frankfurt’s DAX index gained 2.86 points to 2,109.01.

Tokyo stocks ended lower, with the Nikkei-225 index off 45.83 points at 19,665.53.