Goldman earnings cool stock rally, dollar up

An investor gestures in front of an electronic screen showing stock information at a brokerage house in Wuhan, Hubei province October 9, 2009.

NEW YORK (Reuters) - Goldman Sachs Group (GS.N) dampened buoyant investor sentiment on Thursday with earnings that failed to meet high-flying expectations and reversed gains on major stock markets and pushing the dollar higher.

Investor optimism was pumped up after the Dow Jones Industrial Average .DJI hit the psychologically important 10,000 level on Wednesday. The index was down 10 points, or 0.10 percent, to trade at 10,005 in mid-day trading Thursday, after the earnings anti-climax.

The New York-based investment bank, set the tone with its quarterly earnings -- which nearly quadrupled and topped expectations. However, its shares fell on disappointment that so much of the profit came from trading gains that might not be sustainable.

"There were all sorts of rumors flying around that the results were going to be even stronger than consensus, so the initial reaction is that they've slightly disappointed despite beating estimates significantly," said Rupert Armitage of Shore Capital Stock Brokers in London.

Citigroup Inc. (C.N) also reported better-than-expected results, but it was a loss.

World stocks as measured by MSCI were down 0.13 points to 297.30 but remained close to 13-month highs.

Japan's Nikkei closed up 1.8 percent and the FTSEurofirst 300 was up a smidgen, 0.1 percent, to 1017.26.

Overall, world equities remain in a sweet spot.

Bank of America Merrill Lynch said on Wednesday their monthly survey of fund managers had shown increasing bullishness but it had not reached the level yet that risked a sharp counter swing.

"Fears of a double-dip have receded, while worries about inflation and monetary tightening are not imminent enough to prevent an October surge in risk appetite," Michael Hartnett, the bank's chief global equity strategist, said in a note to clients.

The number of U.S. workers filing new claims for jobless insurance unexpectedly fell last week to the lowest level since January, according to a government report on Thursday that hinted at stabilization in the labor market.

"Another decline in jobless claims strongly suggest that the worst for employment conditions have now passed," said Tom Sowanick, co-president and chief investment officer at Omnivest Group LLC.

DOLLAR ENJOYS FLIGHT TO QUALITY

Not coincidentally, the dollar caught a slight bid on optimism the U.S. economy is recovering and the U.S. central bank may raise interest rates sooner than previously thought.

The greenback was up against a basket of major trading-partner currencies, with the U.S. Dollar Index .DXY at 75.553 from a previous session close of 75.551.

Higher U.S. interest rates would make U.S. assets more attractive to investors and increase demand for dollars to buy them.

The euro was down 0.07 percent at $1.4913 from a previous session close of $1.4924. Against the Japanese yen, the dollar was up 1.36 percent at 90.64 from a previous session close of 89.420.

U.S. Treasury debt prices were slightly lower, after a weaker-than-expected reading for a mid-Atlantic business activity index erased most losses prompted by better than expected U.S. economic data.

The benchmark 10-year U.S. Treasury note was down 4/32, with the yield at 3.436 percent, while the 2-year U.S. Treasury note was down 1/32, with the yield at 0.9353 percent.

At the longer end of the yield curve, the 30-year U.S. Treasury bond was down 4/32, with the yield at 4.2806 percent.

(Additional reporting by Jeremy Gaunt and David Brett; editing by Andrew Hay)