GLOBAL MARKETS-Dollar rallies, stocks fall on prospect of US rate hike

Thu Mar 20, 2014 11:28am EDT

* European, Asian, emerging market stocks fall

* Wall St edges higher after Philly Fed data

* Dollar index hits three-week high (Adds quote, recasts lead; dateline previously LONDON)

By Angela Moon

NEW YORK, March 20 (Reuters) - The dollar powered higher against its major currency peers while stocks and bonds fell across the globe on Thursday as investors positioned for a speedier rise in U.S. interest rates than previously thought.

But Wall Street, after opening lower, reversed course to trade higher after the Philadelphia Federal Reserve Bank reported a jump in its business activity index in March, rebounding after a contraction in February and sharply outpacing expectations. In another positive report, jobless claims rose less than expected in the latest week.

Global stocks as measured by the MSCI world equity index fell 0.6 percent following Federal Reserve statements that convinced markets earlier rate hikes may be on the horizon. European and Asian markets had closed before the Fed's policy statement was released on Wednesday.

In her first press conference as chair of the Federal Reserve, Janet Yellen on Wednesday indicated that the first increase in interest rates could come early next year. Yellen, said there would be a "considerable period" between the end of the Fed's bond-buying stimulus program and the first rate increase from the central bank, and said such a period could be six months. Analysts had widely expected a hike in the second half of 2015.

"We're trying to decipher her time frame and get ahead of it," said Frank Davis, director of sales and trading at LEK Securities in New York. "While we didn't make any drastic changes to our positions as a result of what she said, we have a tight watch on her to figure out how she'll play her hand."

The whiplash was felt most in the short end of the Treasury market, which is more sensitive to the course of the Fed funds rate. Yields on two-year notes shot up 8 basis points on Wednesday to 43 basis points, the sharpest single-day rise since mid-2011, and stayed around that level on Thursday.

Yields on 10-year notes were at 2.77 percent, after rising 9 basis points on Wednesday.

European stocks dropped 0.4 percent on Thursday, following losses of more than 1.5 percent in Japan and Asian markets.

On Wall Street, The Dow Jones industrial average rose 60.98 points, or 0.38 percent, to 16,283.15, the S&P 500 gained 6.27 points, or 0.34 percent, to 1,867.04, and the Nasdaq Composite added 15.397 points, or 0.36 percent, to 4,322.999.

Financial shares, which are tied to the pace of economic growth, were among the biggest gainers on Thursday, with the S&P financial group up 1 percent. JPMorgan Chase & Co gained 2.2 percent to $59.58 while Citigroup Inc added 1.9 percent to $49.87.

DOLLAR INDEX AT 3-WEEK HIGH

The dollar surged against a basket of major currencies on Thursday.

The dollar, whose strength this year was one of the big bets of many banks in January, has struggled so far in 2014, weighed down by a rough U.S. winter that has at least temporarily cooled jobs growth and other indications of a broadening economic recovery. But the Fed's comments provided a new jolt.

"From this point forward, at least for the time being you will see a firmer tone to the dollar," said Stephen Gallo, a strategist with Canadian bank BMO in London.

The dollar index, which measures the greenback's strength against a basket of six major currencies, rose to a three-week high of 80.304. It strengthened past resistance around $1.3810 per euro to trade 0.5 percent stronger at $1.3763. The yen fell 0.13 percent to 102.48 yen.

Emerging stocks fell more than 1 percent on Thursday, within sight of their worst level in six weeks.

U.S. crude held above $100 per barrel on Thursday, after gained support from an inventory draw at the benchmark's pricing hub in Cushing, Oklahoma.

U.S. crude for April delivery was trading flat at $100.37 per barrel after settling 67 cents higher. The April contract expires on Friday. (Editing by Leslie Adler)

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