A renewed show of support by the Clinton Administration for the beleaguered Mexican government sparked a rally Thursday in the peso and Mexican stocks, but U.S. stocks and the dollar declined while bond yields rose.
The dollar plunged to a seven-week low against the Japanese yen and declined moderately against the German mark.
Fading hopes for a sharp increase in short-term U.S. interest rates later this month deterred investors, analysts said.
In New York, the dollar plunged to 98.65 yen, down from 100.00 on Wednesday and the lowest level since Nov. 29. It also fell to 1.529 marks, down from 1.537 and the lowest since Nov. 9.
Traders said the mark and yen gained from "safe haven" buying by investors jittery, in the wake of the Mexican debacle, about holding currencies of countries seen as having unstable economies or considered emerging markets.
Mexico's peso also rallied for a second straight day, closing at 5.5 to the dollar, up from 5.65 on Wednesday.
At the same time, Mexico City's Bolsa index rose 90.95 points, or 4.49%, to 2,118.82 points.
Canada's dollar, which hit a nine-year low against the greenback Tuesday, weakened further. The U.S. dollar closed at 1.418 Canadian dollars, up from 1.4108 on Wednesday.
Analysts said some of the pressure on the U.S. dollar probably stemmed from concern that the Federal Reserve Board may delay its next increase in U.S. short-term interest rates due to Mexico's financial troubles.
The dollar's renewed weakness against some major currencies sent bond yields higher amid concerns by investors that foreigners may shun U.S. bonds and other investments that are denominated in dollars, analysts said.
The Treasury's 30-year bond yield finished at 7.87%, up from Wednesday's 7.83%, while its price, which falls when rates rise, fell half a point, or $5 per $1,000 in face value.
Stocks closed on a mixed note amid concerns that the weakened dollar and higher interest rates blunted the positive effects of a comeback in Mexican stocks.
Also pressuring equities was the fear that Mexico's problems might negatively affect the earnings of U.S. companies that do business in Mexico or rely heavily on selling their products there, and that the crisis might spread throughout Latin America.
The Dow Jones industrial average closed down 3.03 points at 3,859.00, while in the broader market, advancing issues outnumbered decliners by 1,124 to 1,066 on the New York Stock Exchange. Big Board volume totaled 312.57 million shares, down from 346.31 million Wednesday.
Broad market indexes were mixed.
Among Thursday's highlights:
* Telefonos de Mexico rose 5/8 to 36 1/4 on leading NYSE volume. Grupo Televisa rose 3/8 to 25 1/4, but Grupo Tribasa fell 1/8 to 11 1/4.
* Intel rose 7/8 to 67 1/8 and Advanced Micro Devices surged 3 1/8 to 31 3/4. The two companies said late Wednesday that they had settled all litigation against each other surrounding AMD's rights to sell clones of Intel's microprocessors.
* Citicorp slumped 1 3/8 to 39, despite reporting strong preliminary fourth-quarter earnings. Analysts and investors fretted about the long-term implications of Mexico's currency crisis, even after Citicorp said the effect on the bank would be minimal.
* J.P. Morgan rallied 3/4 to 57 1/8 after the company released fourth-quarter earnings that indicated trading losses were not as steep as analysts had feared.
Gold stocks benefited from safe-haven buying by investors worried that Mexico's currency crisis could be repeated elsewhere. On New York's Comex, gold closed up $4.10 at $381.40 an ounce.
* Among gold mining stocks, Newmont Gold rose 5/8 to 35 1/8. Battle Mountain Gold added 1/4 to 10.
Other foreign markets closed mixed. In Tokyo, the Nikkei average closed off 138.46 points at 19,410.01. London's Financial Times 100-share average fell 16.2 points to 3,033.2, while in Frankfurt, the 30-share DAX average ended up 10.22 points at 2,071.27.