Fed stimulus plan spurs risk rally; dollar slips

NEW YORK Fri Sep 14, 2012 4:52pm EDT

1 of 2. Traders works at their desks at the Frankfurt stock exchange September 6, 2012.

Credit: Reuters/Alex Domanski

NEW YORK (Reuters) - The Federal Reserve's aggressive new plan to spark the U.S. economy boosted risk assets on Friday, sending global stocks to a 13-month high and driving the dollar to a more than four-month low against the euro.

Brent crude oil rose to a four-month peak, the S&P 500 neared a five-year high and European shares rose to their highest levels in 14 months.

The Fed on Thursday said it would pump $40 billion into the economy each month until the jobs market shows sustained improvement. The aggressive action enhanced what was an already upbeat mood in financial markets since the European Central Bank announced plans to cut the borrowing costs of struggling euro zone members.

"Markets had expected more quantitative easing, but they hadn't expected Bernanke and the Fed to be as aggressive as they were," said Jeffrey Given, senior managing director and senior portfolio manager at John Hancock Asset Management in Boston.

Fed Chairman Ben Bernanke on Thursday cited the dire state of the U.S. labor market, saying it remains a "grave concern."

"The Fed made it sound as if even after the economy recovers, interest rates will remain low. More people are moving into risky assets because Ben is not going to pull the punch bowl away," Given said.

On Wall Street, stocks finished higher, with cyclicals and financials leading the way. An index of U.S. housing shares, aided by the Fed's plan to buy mortgage-backed securities, rose 2.7 percent.

The Dow Jones industrial average .DJI rose 53.51 points, or 0.40 percent, to end at 13,593.37. The Standard & Poor's 500 Index .SPX climbed 5.78 points, or 0.40 percent, to 1,465.77. The Nasdaq Composite Index .IXIC jumped 28.12 points, or 0.89 percent, to 3,183.95.

Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, LLC in Menomonee Falls, Wisconsin, said the Fed's balance sheet could expand by 11 to 12 percent by the end of the year, monetary accommodation that could "translate into a move up in the S&P 500 stock index to the 1,505 area."

In bond markets, yields on 10-year Italian government bonds fell below 5 percent for the first time since late March as the Fed's announcement added momentum to a rally dating from late July.

In contrast, the benchmark 10-year U.S. Treasury note price fell 1-9/32, its yield rising to 1.87 percent from 1.73 percent late on Thursday as investors exited safe-haven debt in search of higher returns in riskier assets.

"A lot of good news out of Europe had already caused risk markets to rally going into the Fed meeting so the Fed's open-ended plan to buy mortgage-backed securities, its intent to keep rates low until mid-2015, and its strategy to keep monetary policy highly stimulative - even if the economy accelerated - was a pretty potent combination and threw fuel on the rally," said Robert Tipp, chief investment strategist for Prudential Fixed Income, with $330 billion in assets under management.

Euro zone finance ministers met in Cyprus on Friday, hoping to build on progress the bloc has made this month following plans announced by ECB President Mario Draghi and a German court's green light this week for the euro zone's ESM bailout fund.

European equities surged, with the pan-European FTSEurofirst 300 index .FTEU3 rising 1.25 percent to 1,120.15. The MSCI index of global stocks .MIWD00000PUS jumped 1.6 percent to 340.03, near its highest level since August last year.

DOLLAR WEAKNESS

The dollar index .DXY fell 0.5 percent to near four-month lows at 78.903.

The dollar's broad decline left the euro at a four-month high above $1.31, the latest in a string of technical and psychological levels it has cut through this week.

"With Europe getting their act together (at least temporarily), the Fed flooding the market with cash, and China talking (about) stimulatory infrastructure projects, the three largest influences of market dynamics could be creating a bull market for at least the near term," said Neal Gilbert, currency strategist at GFT Forex.

Brent crude oil rose 79 cents to $116.67 a barrel by 1735 GMT after reaching a four-month peak of $117.95. The global North Sea benchmark was on track to end the week up more than 2 percent.

U.S. crude rose 68 cents to $98.99 a barrel after hitting a four-month high of $100.42. It was on track to close the week up 3 percent.

Base metals also rallied. Aluminum, copper, lead and zinc all jumped between 3 and 5 percent on hopes the Fed's move would bolster global demand for manufacturing and building materials.

Gold hit a 6-1/2-month high, putting it on course for a fourth straight week of gains and extending Thursday's 2 percent rise. Spot gold stood at $1.771.06 an ounce at 1822 GMT. <GOL/>

German bond yields hit an 11-week high on Friday as low-risk government bonds sold off after the Fed stimulus moves.

The yield on 10-year Italian bonds fell below 5 percent for the first time since March 26 and was down 4 basis points on the day at 4.99 percent. Equivalent Spanish yields stood at 5.82 percent.

(Additional reporting by Ana Nicolaci da Costa and William James in London; Editing by Leslie Adler and Dan Grebler)