FINANCIAL MARKETS : Stocks Mixed Amid Dollar, Trade Gap Fears

U.S. stocks turned in a mixed performance for a third straight session Thursday, as blue chips languished while smaller stocks mostly advanced.

Yet the cause of blue chips’ recent problems--the stronger dollar--lost ground on the heels of a disappointing U.S. trade deficit report.

The dollar, which had soared early in the week as world central banks aggressively bought the currency, slipped to 97.05 yen in New York from 97.78 on Wednesday, and to 1.475 German marks from 1.478.

Analysts cited the government’s report that the U.S. trade deficit rose 2.4% in June to $11.31 billion. Many experts had expected the trade gap to shrink because of the decelerating U.S. economy.

But while imports declined in June, exports fell even faster, thus producing a wider trade gap.

Currency traders had been hoping for a smaller gap, which might have reinforced the dollar’s recent turnaround. Even so, the nation’s trade deficit with Japan did shrink slightly. And many experts believe the dollar is just pausing here and will continue to advance in coming months.

One factor that could help the dollar would be a stronger U.S. economy, and there was some evidence Thursday that activity is picking up.

The Federal Reserve Bank of Philadelphia, in a report on that region’s manufacturing sector, found that for the first time since March, more firms are reporting increases in business activity than declines.

Surprisingly, the bond market took that news in stride, as yields closed just slightly higher. The 30-year Treasury bond yield crept up to 6.89% from 6.88% on Wednesday.

Thursday’s trading continued this week’s pattern in which bonds sell off at the start of trading only to rebound by day’s end, said James Connelly, head government bond trader at Dillon Read. The pattern reflects the failed efforts of speculators to drive the 30-year T-bond yield above 7%, he said.

“I think 7% is going to hold a couple more times,” he said.

On Wall Street, meanwhile, mild selling of multinational stocks depressed the Dow Jones industrial average again, and it lost 8.42 points to 4,630.66.

A rising dollar could cut into earnings growth of multinationals because their foreign profits would buy fewer dollars when brought home.

Although many analysts say worries about the dollar’s effect on multinationals’ earnings may be exaggerated, some investors continue to shift money into stocks of smaller companies that are more dependent on the U.S. economy.

“In the past, the more overseas exposure you had the more Wall Street liked you,” said Franklin Morton, research chief at Ariel Capital in Chicago. “That has changed in the past week.”

On the Nasdaq market of mostly smaller stocks, 19 stocks rose for every 15 that fell on Thursday, while on the NYSE winners barely edged losers. Trading was active in both markets.

Also, the Russell 2,000 index of small stocks gained 1.30 points to a record 303.65, and the composite index of the American Stock Exchange, also home to mostly small issues, rose 2.39 points to a record 528.86.

Among Thursday’s highlights:

* Technology issues continued to lead the small-stock surge. Altera jumped 2 1/2 to 37 1/2, Cirrus Logic rose 2 7/8 to 54 1/4, Creative Technologies jumped 1 1/2 to 11 3/4 and Uunet advanced 1 1/4 to 46 1/4.

* Other small-company stocks posting big gains included Thermolase, up 2 1/8 to 25 1/2; Align-Rite, up 1 1/4 to 16 1/2; Day Runner, up 1 to 19 1/4; Marshall Industries, up 1 1/8 to 33 1/8; Ross Stores, up 11/16 to 15 11/16, and restaurant chain Koo Koo Roo, up 13/16 to 9 3/4.

* Airlines paced a broad rise in transportation issues on expectations of rising traffic. AMR, parent company of American Airlines, shot up 2 5/8 to 74; Delta gained 1 7/8 to 77 1/8, and UAL, parent of United Airlines, jumped 4 3/8 to 151 5/8.

* Blue-chip issues losing ground in the Dow included Boeing, down 5/8 to 62 5/8; GM, down 1 to 47 3/8, and Philip Morris, off 3/4 to 72 1/2.

* Deere didn’t help the multinationals’ case, posting lower-than-expected quarterly earnings. The stock dropped 2 1/2 to 83 3/4.

* Elsewhere, metal and mining stocks showed strength. Inco gained 1 to 37 1/8, Kaiser Aluminum jumped 1 7/8 to 20 3/8 and Alcoa was up 5/8 to 58 7/8, a record high.

* Among Southland issues, Aames Financial surged 3 7/8 to 25 7/8, though the mortgage banking firm said it had no news. The company recently posted strong quarterly earnings.

In foreign trading, Mexican stocks extended losses amid concerns about a late slump in the peso and the depressed state of the economy.

On hefty volume of 203 million shares, the Bolsa stock index lost 17.21 points to 2,485.42.

In Tokyo, profit taking pressure after two days of big gains left stocks little changed, as investors continued chasing selected issues and the market’s tone remained bullish. The Nikkei-225 index eased 9.03 points to 18,149.70.

In commodities trading, silver prices jumped on continuing concerns about supposedly tight supplies. Silver futures for August soared 21 cents to $5.58 an ounce.

But crude oil prices rose only modestly after the Pentagon said it’s monitoring “unusual” military activities in Iraq and readying U.S. troops, ships and supplies in case it decides to act.

Crude futures for September on the New York Merc added just 11 cents to $17.66 a barrel.

U.S. intelligence observed “unusual training activities, unusual movements of force” inside Iraq, a Pentagon official said. Together, the various movements appear “potentially challenging and possibly threatening,” the official said.

Markets Roundup, D6