Yields Ease but Blue Chips, Dollar Fall Again

The bond market rallied modestly Wednesday on more favorable inflation news, but blue-chip stocks continued their latest slide.

Meanwhile, the dollar tumbled against major currencies after the German central bank hinted that it may be compelled to raise interest rates soon.

In a volatile session, the Dow Jones industrials eased 32.52 points to 7,928.32, bringing the index’s decline from its all-time high last week to 4%.

Smaller stocks generally fared better. Winners had a small edge over losers on the Nasdaq market, and the Nasdaq composite index rose 7.16 points to 1,583.40.

In the U.S. bond market, yields eased after the government reported that wholesale prices fell in July for the seventh straight month. (Story, A1.)

Also, the government said July retail sales were higher but not particularly robust.

The news seemed to calm some bond traders. Yields had surged over the last two weeks on worries that the economy--and inflation--might be reheating.

The bellwether 30-year Treasury bond yield dipped to 6.62% from 6.67% on Tuesday. Shorter-term yields also fell.

“The [Federal Reserve] will be able to have a fairly short meeting” next week, said Lennart Carlson, who oversees $20 billion of bonds at Aeltus Investment Management in Hartford, Conn. With inflation still subdued, the central bank is unlikely to feel the need to tighten credit.

But that may not be true of the German central bank much longer. The dollar began its descent in European trading after the Bundesbank said in its monthly report that it will “closely observe the further development of exchange rates with regard to the risks of a stability-oriented policy.”

That suggested the Bundesbank may consider raising interest rates to strengthen the sagging mark, which has lost 16% of its value against the dollar so far this year.

The mark soared in value Wednesday, rising to 1.8352 per dollar from 1.8645 on Tuesday. The yen also strengthened, to 115.69 per dollar from 116.43.

Analysts said the dollar’s slump weighed on financial markets, because a weaker currency raises the risk that foreigners will sell their U.S. stock and bond holdings.

“If you were to put a gun to my head and ask for one word that moved the markets today it would be ‘currency,’ ” said Phil Orlando, chief investment officer at Value Line Asset Management.

With blue-chip stocks already in decline in recent sessions, currency worries just encouraged sellers on Wednesday, analysts said.

Among the market highlights:

* Consumer-related blue-chip stocks continuing to slide included Merck, down $1 to $92.63; Eli Lilly, down $2.13 to $104.50; and Coca-Cola, down 50 cents to $60.44. (Investor Spotlight, D7.)

* Micron Technology plunged $7.50 to $42.63 on growing worries about slumping chip prices.

But other tech stocks fared better. Applied Materials soared $9.13 to $99.38 on a strong earnings report.

* Many retail stocks rose amid enthusiasm about the July sales figures. May Department Stores gained $1.19 to $55.13, Wal-Mart Stores rose $1 to $36.94 and Nordstrom surged $4.63 to $61.50.

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Market Roundup, D6