U.S. reform pact caps stocks' drops, dollar off

NEW YORK (Reuters) - Worries about the fragility of the global economic recovery capped financial markets on Friday, with Wall Street shares fighting back amid relief that banks have dodged draconian regulatory reforms.

The euro erased losses against the dollar and hit a session high, buoyed by stocks' slim comeback and a commodity rally that lifted the price of oil to a seven-week high. That helped the euro fight off earlier weakness amid concerns about fiscal strains in Europe.

Earlier, a report that showed U.S. first-quarter growth slower than first estimated had prompted safe-haven flows into the dollar. But consumer sentiment in the United States rose, providing limited support for Wall Street stocks and ultimately reversing the bid for dollars.

The U.S. data capped a week in which investors have been pulling back a bit from riskier assets as evidence grew that economic growth, particularly in the United States, may fall short of 2010 forecasts.

"Overall, we have a modest recovery going on," said Paul Ballew, chief economist at U.S. insurer Nationwide in Columbus, Ohio. "The conversation of a double-dip recession is a bit aggressive. You are getting growth in fits and starts, rather than an outright contraction."

On Wall Street, financial stocks gained as uncertainty ebbed following an historic agreement to overhaul financial regulations. Business models were preserved even as provisions cut into profitability and added layers to regulators.

JPMorgan Chase & Co (JPM.N) shot up 3.7 percent, while Bank of America Corp (BAC.N) gained 2.7 percent. The KBW bank index .BKX jumped 2.9 percent.

"It is not very different from what investors and we had come to expect in the last few weeks, with the most onerous provisions getting watered down," analysts at Morgan Keegan said in a note to clients.

U.S. lawmakers hammered out the new Wall Street regulations in the early hours on Friday, though the measure must still win approval from both chambers of Congress before U.S. President Barack Obama can sign it into law.

Optimism for business spending rose as Oracle Corp (ORCL.O), the world's third-largest software maker, posted a better-than-expected quarterly profit on strong sales of new products. [ID:nN24168374]. Its stock rose 2 percent to $22.66.

G8 leaders meeting on Friday in Canada -- turning into the G20 on Saturday -- are set to grapple with fears that the spending cuts and tax increases being promulgated by European governments to cut debt will hurt the recovery. Meanwhile, Washington is warning against cutting too far and too fast.

MSCI's all-country world index .MIWD00000PUS declined 0.27 percent, heading for a weekly loss of more than 2 percent and its fourth straight losing session. Its emerging market counterpart .MSCIEF slipped 0.48 percent.

In New York, the Dow Jones industrial average .DJI shed 8.99 points, or 0.09 percent, to end at 10,143.81. But the Standard & Poor's 500 Index .SPX rose 3.07 points, or 0.29 percent, to 1,076.76 and the Nasdaq Composite Index .IXIC advanced 6.06 points, or 0.27 percent, to close at 2,223.48.

For the week, the Dow fell 2.94 percent, while the S&P 500 slid 3.65 percent and Nasdaq dropped 3.74 percent.

European shares turned negative after initially bucking the trend. The FTSEurofirst 300 .FTEU3 fell 0.7 percent to end at 1,013.58, a two-week closing low, adding to three previous days of losses.

Earlier, Japan's Nikkei average .N225 fell 1.9 percent to finish at 9,737.48, its lowest close in two weeks.

EURO BOUNCES

The euro overcame earlier weakness to wipe out losses against the dollar and hit a session high at $1.2396 as traders cited a minor comeback in stocks and the rally in commodities. The euro was last quoted at $1.2379, up 0.37 percent from Thursday's New York close.

The dollar fell against the yen after the earlier report of soft U.S. economic growth.

Earlier in the day, funding concerns in the euro zone had prompted caution as banks need to repay some 442 billion euros in one-year loans to the European Central Bank next week.

The dollar slipped against a basket of major trading-partner currencies, with the U.S. Dollar Index .DXY down 0.48 percent at 85.325.

Against the yen, the dollar declined 0.30 percent to 89.27 Japanese yen.

U.S. Treasury debt prices rose after the disappointing report on U.S. economic growth. Benchmark 10-year Treasury notes rose 9/32 in price, while yields declined to 3.11 percent from 3.14 percent late Thursday.

Core euro-zone government bonds struggled to make further headway after three consecutive days of gains drove futures to two-week highs. Losses were limited by stocks' weakness.

In commodities, U.S. light sweet crude oil for August delivery settled at a seven-week high at $78,86 a barrel -- up $2.35, or 3.07 percent, for the day. Oil prices jumped on concerns that a tropical storm in the Caribbean might get stronger and head to the Gulf of Mexico, where BP Plc (BP.L)(BP.N) is trying to clean up its huge oil spill.

Spot gold prices rose $11.05, or 0.89 percent, to $1,255.10 an ounce.