Stocks up, subprime smacks dollar

By Joan Gralla

NEW YORK (Reuters) - U.S. blue-chip stocks firmed on Wednesday as investors hedged their bets about the impact of a housing downturn, although the subprime mortgage crisis helped push the dollar to a record low against the euro.

U.S. Treasury bonds slipped amid rising stock prices and after the benchmark note failed to break convincingly below 5 percent.

The falling dollar drove gold to a one-month high and oil prices rose on data showing falling supplies of crude in the United States.

Wall Street stocks were also underpinned by gains in McDonald's Corp. (MCD.N) and bargain-hunting. On Tuesday, stocks fell sharply after a warning by credit rating agencies, including Standard & Poor's, that they would begin to slash ratings on more than $17 billion of U.S. mortgage-related debt.

"Some people feel there was an overreaction to S&P's announcement about subprime debt," said Michael Metz, chief investment strategist, with Oppenheimer & Co. in New York.

The benchmark indexes were up, helped stocks that are considered less vulnerable to an economic downturn. McDonald's rose nearly 1 percent to $50.75, Johnson & Johnson (JNJ.N) rose 0.8 percent to $62.68.

The Dow Jones industrial average .DJI was up 33.25 points, or 0.25 percent, at 13,534.95. The Standard & Poor's 500 Index .SPX was up 3.59 points, or 0.24 percent, at 1,513.71. The Nasdaq Composite Index .IXIC was up 3.91 points, or 0.15 percent, at 2,643.07.

SUBPRIME JITTERS

Still, the fallout from Tuesday's decision by S&P and Moody's Investors Service echoed through markets.

Subprime mortgages make up around a fifth of total U.S. annual mortgage lending and a fallout could threaten banks with bad debts, raise borrowing costs and hurt corporate earnings.

Junk bond spreads widened 19 basis points on average, reaching their highest level since December, as increasingly wary investors demanded higher yields, according to Merrill Lynch.

In the derivatives sector, whose growth has boomed in the past few years, credit default swaps widened sharply as investors rushed to buy protection against the threat of default on corporate bonds and other instruments.

In currencies, the move by ratings agencies helped push the dollar to a 26-year low against sterling GBP= at $2.0351 and a record low against the euro EUR= at $1.3787. It also hit a one-month trough against the yen JPY=.

The yen's rise also showed investors were unwinding some carry trades, in which low-yield currencies including Japan's are sold for higher-returning units.

The U.S. Dollar Index .DXY, a basket of major trading partner currencies, was down 0.24 percent at 80.665 from a previous session close of 80.860.