FINANCIAL MARKETS : Stocks Gain as Dollar Rockets; Bonds Mixed

The dollar soared in a surprise rally Thursday, posting its best one-day gain against the Japanese yen in nearly four years--to nearly 86 yen--and rising strongly against most other major currencies.

The U.S. stock market, meanwhile, showed little negative reaction to the buck’s boost, with the Dow Jones industrials adding 6.57 points to a record 4,411.19. Some foreign markets were up sharply.

In the U.S. bond market, Wednesday’s selloff of shorter-term issues continued, while longer-term yields eased slightly.

Some traders said the dollar’s recovery was long overdue, after the deep selloff of recent months.

The apparent trigger for Thursday’s rally was the House Budget Committee’s vote on a plan to slash federal spending through the year 2002. Analysts said dollar bears began to fear that Congress will make real progress in reducing the budget deficit, a major reason for the global dollar glut.

Once the dollar began to turn, speculators who had “shorted” the currency--betting on a further decline--rushed to buy dollars.

As the rally fed on itself, the dollar rocketed to close at 85.65 yen in New York, up from 83.91 on Wednesday and the highest since April 6, and to 1.432 marks, up from 1.388 on Wednesday and the highest since March 3.

Meanwhile, the U.S. stock market seemed to pay little attention to the dollar rally. In theory, a stronger dollar could hurt overseas earnings for many U.S. companies, but investors appeared more focused on prospects for an economic “soft landing.”

The government’s report Thursday on April retail sales suggested further deceleration of the economy, though analysts said the sales decline was skewed by plunging demand for cars.

In any case, most broad stock indexes advanced to new highs, and winners edged losers on the Big Board. Smaller stocks showed more strength than blue chips, with the Nasdaq composite index up 6.21 points to 853.83, a new high.

Overseas, smaller Asian markets soared on hopes for a stable dollar. Singapore’s chief share index zoomed 3.5%, Malaysia’s jumped 5.3% and Hong Kong’s gained 2.6%. European markets were also strong. But Tokyo’s Nikkei-225 index slumped 2.2%.

Elsewhere, the U.S. bond market struggled Thursday. Shorter-term yields, which began to rebound on Wednesday, closed higher though below the day’s peaks. The yield on two-year Treasury notes, for example, rose from 6.14% on Wednesday to 6.22% by midday Thursday before falling back to 6.17%.

Some analysts said the market was unnerved by the Labor Department’s report that wholesale inflation shot up by 0.5% in April, the biggest increase in five months.

But long-term yields--which should react worst to inflation fears--actually eased. The 30-year T-bond yield closed at 6.98%, compared to 6.99% on Wednesday.

Among Thursday’s highlights:

* Industrial issues led the Dow higher, as some investors chose to bet that the economy’s slowdown will lead to a longer expansion. Alcoa gained 1 1/8 to 44 1/2, International Paper surged 1 1/4 to 78 7/8 and DuPont jumped 7/8 to 69.

Among other industrials, Reynolds Metals leaped 1 5/8 to 48 7/8, Dow Chemical jumped 1 3/4 to 72 1/4, Emerson Electric surged 1 1/4 to 70 1/4 and Cummins Engine was up 7/8 to 47.

* Tech stocks were strong. Microsoft rocketed 2 1/8 to 81 3/8, Adobe gained 1 3/4 to 55 1/2, Texas Instruments zoomed 3 1/8 to 114 7/8 and Qualcomm leaped 3 1/8 to 28.

* Retail stocks in general were up sharply. Some analysts said the government’s April retail sales report showed store sales were stronger than expected, though auto sales were down. Dayton Hudson leaped 2 3/4 to 71, J.C. Penney gained 1 1/2 to 46, Wal-Mart added 7/8 to 24 3/8 and Limited rose 7/8 to 22 1/8.