Battered euro, U.S. stocks get lift from Fed

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange April 26, 2010.

NEW YORK (Reuters) - The euro rallied from one-year lows on Wednesday and U.S. share prices gained after the U.S. Federal Reserve left interest rates near zero and gave an upbeat assessment of the U.S. economy.

Just as the euro appeared to be recovering some ground from Tuesday's sell-off, which had been spurred by Standard & Poor's slashing of credit ratings for Greece to junk status and a downgrade of Portugal, S&P on Wednesday cut Spain's rating one notch, raising concerns of spreading sovereign credit risks in the euro zone.

The Fed's decision to keep rates at "exceptionally low" levels "for an extended period" undermined the U.S. dollar and helped lift gold prices to highs for the year.

"The fact that the Fed is keeping rates low will be a relief for stocks, which have been in a trading range recently." said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

"The downgrades in Europe are probably having an impact on the way the Fed is thinking. The risk is that they get frozen into their comments about extended periods since that's language they don't need."

At the close, the Dow Jones industrial average .DJI gained 53.28 points, or 0.48 percent, to 11,045.27. The Standard & Poor's 500 Index .SPX rose 7.65 points, or 0.65 percent, to 1,191.36. The Nasdaq Composite Index .IXIC climbed 0.26 points, or 0.01 percent, to 2,471.73.

Energy and financial shares were the top U.S. performers. JPMorgan Chase (JPM.N) rose 2.5 percent to $43.46 and Exxon Mobil Corp (XOM.N) added 1.4 percent to $69.19.

EUROPE TALKS

Prior to the Fed's decision, the downgrade on Spain had sapped the euro's efforts to regain ground on news of an aid package that emerged from a meeting between German officials and the head of the International Monetary Fund in Berlin on Wednesday.

IMF Managing Director Dominique Strauss-Kahn estimated an aid package for Greece at 100 billion to 120 billion euros over three years, according to German officials who met with him.

"The hesitant and haphazard reaction of euro zone policy makers to Greece's predicament underscores the dangers of contagion," Marco Annunziata, chief economist at UniCredit Group wrote clients.

"The euro zone has taken over six months to react and is allowing uncertainty to persist nearly to the eve of the May redemptions -- this does not bode well for their ability to react quickly should a second flashpoint burst," he noted, referring to Greek debt payments coming due next month.

The euro traded up 0.41 percent to $1.3218 in late New York trade, after earlier hitting a one-year low of $1.3112. The U.S. dollar index, a measure of the greenback against a basket of major trading-partner currencies, rose 0.08 percent .DXY.

European share prices hit seven-week lows earlier in the day on the sovereign credit concerns. S&P said the cut for Spain was due to concerns about a more protracted period of sluggish growth than previously expected.

The FTSEurofirst 300 .FTEU3 index of top European shares lost 1.15 percent to close at 1,056.89 points.

World stocks as measured by MSCI .MIWD00000PUS were down 0.96 percent, having lost more than 2 percent on Tuesday. The more volatile emerging market index .MSCIEF lost 1.64 percent to add to 1.4 percent in the previous session.

Share prices in Tokyo lost 2.57 percent .N225.

The 10-year Greek/German government bond yield spread narrowed to 799 basis points after earlier peaking at more than 1,000 basis points.

At one point the Greek government's two-year debt yield surged to 38 percent.

U.S. Treasuries fell back from Tuesday's gains after the Fed said in its statement: "Economic activity has continued to strengthen and ... the labor market is beginning to improve."

The solidifying of gains in equities undermined fixed income markets. The 10-year benchmark U.S. Treasury fell 21/32 to 3.769 percent.

Spot gold recovered ground to make a new high for the year, topping $1,174.18 before drifting lower, while U.S. gold futures for June deliver on the COMEX division of the NYMEX settled up $9.60 at $1,171.80 an ounce.

Oil rose as falling U.S. gasoline inventories and the Fed's upbeat assessment of the economy offset concerns about Europe after S&P's downgrade of Spain.

U.S. crude for June delivery rose 78 cents a barrel to settle at $83.22 a barrel. London Brent for June delivery ended up 38 cents at $86.16 a barrel.

(Additional reporting by Ryan Vlastelica, Richard Leong, Frank Tang, Ellen Freilich, Edward Krudy in New York, Jeremy Gaunt, Atul Prakash and Jessica Mortimer in London; Editing by Leslie Adler)