FINANCIAL MARKETS : Small Stocks Keep Rising as Trading Calms

Small-company shares ended the week as they began it, out-pacing their blue-chip brethren. Overall, the U.S. stock market enjoyed a calm session Friday, after several record volume days.

Meanwhile, the dollar slumped versus the Japanese yen on growing fears that Japan is set to raise interest rates. U.S. bond yields, however, were mostly unchanged.

On Wall Street the Nasdaq composite index of mostly smaller stocks closed up 2.72 points to a record 1,186.89, its seventh straight advance. For the week the index gained 48.19 points, or 4.2%, and it now is up 12.8% year-to-date.

In contrast, the Dow Jones industrial average added 1.08 points on Friday to 5,567.99, and was up just 0.6% for the week. The blue-chip Dow, which had led the market in January, is up 8.8% for the year, trailing the Nasdaq index’s gain by about a third.

Investors’ hunger for smaller stocks has mushroomed this month, as Wall Street has focused on the U.S. economy’s resilience. Many smaller firms depend heavily on the U.S. economy for sales and earnings, while blue-chip firms often depend more on foreign results.

At the same time, the dollar’s recent surge has threatened blue-chip firms’ overseas earnings.

On Friday, however, the dollar sank to 105.55 Japanese yen in New York, down from 106.70 Thursday, and to 1.528 German marks, down from 1.534.

Currency traders said the catalyst for the dollar’s decline was an article in the Asahi Shimbun, one of Japan’s biggest daily newspapers, which said the Bank of Japan may raise its official discount rate as early as May.

The discount rate, the base central bank lending rate, now is a record low 0.5%. Japan has maintained a policy of super-low interest rates in recent years in an attempt to reignite its economy. With growth picking up, expectations are that rates will soon rise.

Higher rates could help strengthen the yen again--at the dollar’s expense--by making yen-denominated investments more appealing to global investors.

On Wall Street, however, the dollar’s fall Friday didn’t interrupt the trend toward smaller stocks. Although a revival of interest in technology shares gets much of the credit for boosting the tech-heavy Nasdaq index, every other small-stock index also has been hitting records this week as well.

On Friday winners topped losers by 21 to 16 on Nasdaq and by 14 to 10 on the Big Board.

With first-quarter earnings-reporting season winding down--and results generally better than expected--the markets’ next big test will be the April employment report due next Friday.

Among Friday’s highlights:

* Retail stocks were higher on news that J.C. Penney had bid for Dayton Hudson, only to be rebuffed. Penney rose 1 to 49 3/4, Dayton gained 2 1/4 to 94 7/8, Mercantile Stores jumped 1 1/8 to 62 5/8 and Nordstrom leaped 2 1/2 to 50 1/8.

* Some bank stocks returned to favor. BankAmerica rose 2 to 75 5/8, Mellon added 3/4 to 53 7/8 and First Union jumped 2 1/8 to 61 1/4.

* Profit-taking hit some tech issues, including Compaq, off 1 1/2 to 45 5/8; Sun Microsystems, down 1 5/8 to 54; and Netcom On-line, down 1 7/8 to 33.

Market Roundup, D4