Dollar soars, stocks set new highs on Fed stimulus exit talk

NEW YORK Fri May 17, 2013 4:28pm EDT

1 of 6. Traders work on the floor at the New York Stock Exchange, May 16, 2013.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - The U.S. dollar soared against major currencies on Friday on growing speculation that the Federal Reserve could soon begin to rein in its bond-buying program and after data showed U.S. consumer sentiment hit an almost six-year high in early May.

The Dow Jones Industrial Average and benchmark S&P 500 stock index surged to new closing highs in a rally that has pushed both indices this year up 17 percent.

Major European equity indexes climbed to highs last seen five years ago or more, helped by a rally in automakers' shares, which rose on signs of a revival in domestic sales.

Stocks on both sides of the Atlantic were boosted after a survey of U.S. consumer sentiment in early May rose more than economists had expected, with more Americans giving favorable views about their financial and economic prospects, particularly among upper-income households.

In a separate report by an industry group, a gauge of future economic activity also suggested the expected U.S. slowdown will be temporary, with the index rising in April to a near five-year high.

The two reports were encouraging after a raft of data on Thursday had suggested U.S. economic growth is cooling.

The dollar's strength was largely attributed to the euro, which fell to a six-week low on talk the European Central Bank could introduce negative deposit rates, a move that effectively would make banks pay to park their cash overnight with the ECB. The ECB had no immediate comment.

The U.S. dollar index .DXY, which measures its value against a basket of six major currencies, rose to 84.371, its highest in nearly three years. Around midday in New York, the dollar index was up 0.81 percent at 84.266.

The euro fell 0.42 percent to $1.2827, while the dollar hit a 4-1/2-year high versus the Japanese yen, up 0.93 percent at 103.19 yen.

Few fear that the dollar rally will lose steam anytime soon.

"It is a dollar story this year as the U.S. labor and housing markets appear to be recovering," said Peter Kinsella, currency strategist at Commerzbank in London.

A measure of global equity activity, MSCI's all-country world stock index .MIWD00000PUS, rose 0.22 percent in a rocky session as it was tugged downward by emerging markets.

The Dow Jones Industrial Average .DJI closed up 121.18 points, or 0.80 percent, at 15,354.40. The Standard & Poor's 500 Index .SPX rose 15.65 points, or 0.95 percent, at 1,666.12. The Nasdaq Composite Index .IXIC gained 33.72 points, or 0.97 percent, at 3,498.97.

For the week, the Dow rose 1.6 percent, the S&P gained 2.0 percent and the Nasdaq added 1.8 percent.

Among other indexes, the Russell 2000 index .RUT of small- and mid-cap stocks also surged to a record close. The index closed up 10.94 points, or 1.11 percent, at 996.28.

The FTSEurofirst-300 index of European shares .FTEU3 bounced off session lows to rise 0.22 percent to close at 1,248.18, a five-year closing high. The index was up 1.3 percent for the week, marking a fourth straight week of gains.

In London, the FTSE-100 index .FTSE gained 0.53 percent to 6,723.06, a level last seen in October 2007.

Gold prices fell for a seventh straight session, the longest losing streak in four years, driven by speculation that the Fed may soon ease its asset-purchase program.

U.S. gold futures for June delivery settled down 1.6 percent at $1,364.70 an ounce. For the week, gold fell more than 5 percent.

Spot gold prices lost $29.43 to $1,356.20 an ounce.

U.S. stocks and gold prices fell while the dollar rose on Thursday, following comments from John Williams, president of the Federal Reserve Bank of San Francisco, that the Fed could begin easing up on stimulus this summer.

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U.S. consumer sentiment: link.reuters.com/xub84t

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Prices for U.S. Treasuries added to losses after the Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment rose to 83.7 in early May from 76.4 last month, topping economists' expectations for 78.

The May reading was the highest level since July 2007.

The benchmark 10-year U.S. Treasury note fell 21/32 in price to yield 1.9524 percent.

In Europe, German Bunds hit one-week highs, with traders citing talk that the ECB was checking with banks on whether they were ready for a potential cut in its deposit rate to below zero.

German Bund futures rose as much as 43 ticks on the day to 145.74, before paring gains to trade 17 ticks lower.

Oil climbed for a third straight session, supported by a raft of strong economic data, though the strong dollar limited gains.

Brent crude rose 86 cents to settle at $104.64 a barrel. U.S. crude futures settled 86 cents higher at $96.02.

(Reporting by Herbert Lash in New York; Additional reporting by David Brett in London; Editing by Chizu Nomiyama, Jan Paschal, Leslie Adler and James Dalgleish)