LONDON, Jan 28 (Reuters) - Global equities rallied on Thursday as U.S. President Barack Obama focused on job creation rather than any concrete details of banking reforms which have spooked financial markets.
Obama's proposals last week on restricting risk-taking and potentially breaking up the banking sector had fuelled a global market sell-off but his State of the Union speech was pinned chiefly to spurring job creation.
That boosted demand for riskier assets, pulling the dollar back off five-month highs hit earlier after the U.S. Federal Reserve concluded a policy meeting. World stocks as measured by MSCI .MIWD00000PUS rose 0.6 percent.
European shares .FTEU3 gained 1.3 percent, bouncing back from a sharp one-week slide, and following gains in Asia and on Wall Street overnight.
Banks, beaten down over the past week by worries over the White House's plan to curb risk-taking by financial institutions, were among the top gainers in Europe. "The violence of the sell-off has been surprising, investors panicked," said Jacques Henry, analyst at Louis Capital Markets, in Paris. "But I don't think this has been a change in trend. Macro data is pointing in the other direction."
The U.S. Federal Reserve kept interest rates steady as expected and gave a cautiously upbeat view on the economy, also buoying shares, though there was surprise as one policymaker dissented on language on keeping rates low for an extended time.
The U.S. Treasury yield curve flattened as the difference between the short- and long-term yields narrowed and the dollar rallied to 5-month highs against a basket of currencies after Kansas City Fed President Thomas Hoenig's dissent raised speculation of higher U.S. interest rates.
A Reuters poll taken shortly after the Fed's decision showed nine of the 15 primary dealers responding said they expected the Fed to start raising interest rates this year. [FED/R]
The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.1 percent at 78.568 .DXY. It rose as far as 79.066, its highest since August last year.
The euro EUR= remained under pressure on concerns over the heavily indebted smaller euro zone countries such as Greece and Portugal.
On Wednesday, the premium to hold Greek debt rather than benchmark German bonds soared to its highest since the euro was launched more than a decade ago.
"Sentiment definitely remains negative for the euro because of the Greece problem," said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.
"I thought the Greece story would eventually die down, but that doesn't seem to be the cause, and there are more countries in the pipeline (who are facing debt problems)."
Ratings firm Standard & Poor's said on Thursday it would look beyond Portugal's 2010 budget to the country's updated EU stability plan before deciding on a potential downgrade. It changed the outlook on Portugal's rating to negative last month.
Markets will keep an eye as Fed chief Ben Bernanke's nomination for a second term faces a decisive day in the Senate on Thursday when his confirmation vote looks set to go ahead.
Bernanke had been widely seen as getting the support he needs but a recent surge of public anger at big banks and the way U.S. regulators rescued them from the financial crisis has meant the vote could be a lot closer than expected.
His terms runs out on Sunday.
U.S. crude oil futures rose towards $74 a barrel, rebounding from six-week lows [O/R], while gold XAU= firmed after the dollar eased. (Additional reporting by Blaise Robinson and Naomi Tajitsu; editing by Patrick Graham)