Stocks fly, dollar slips on Fed's rate cut
NEW YORK (Reuters) - Stocks shot higher on Wall Street and in Europe in a powerful rally on Friday after the Federal Reserve cut the discount rate it charges on direct loans to banks in a bid to calm anxious markets and defuse a global credit shortage.
The Fed's surprising move came more than an hour before Wall Street's opening bell, when it cut the discount rate by 50 basis points to 5.75 percent. The U.S. central bank cited slowed economic growth from deteriorating financial market conditions and tighter credit as the reasons for its action.
Afterward, the U.S. dollar fell against the euro and other major currencies as some dealers saw the Fed's move as a step toward a benchmark interest rate cut.
"The discount rate cut today greatly increases the odds for a fed funds rate cut," said John Canavan, a research analyst at Stone and McCarthy Research Associates in Princeton, New Jersey, adding that he expected a rate cut at the Fed's next policy meeting on September 18.
The Fed left its target for the fed funds rate, or the overnight bank lending rate, unchanged on Friday at 5.25 percent.
Bond prices were mixed after the Fed's discount rate cut decreased demand for safe-haven assets. But the two-year note US2YT=RR the maturity most sensitive to the outlook for interest rates, was up 3/32 in price, with its yield slipping to 4.19 percent in afternoon trade from 4.20 percent on Thursday.
The Dow Jones industrial average .DJI initially jumped 321.90 points to a session high at 13,167.68 on Friday morning in a relief rally fueled by the Fed's rate cut. The Standard & Poor's 500 index .SPX gained 39.06 points to an intraday high at 1,450.33 and the Nasdaq composite index .IXIC ratcheted up 73.89 points to an intraday high at 2,524.96.
By afternoon, stocks had trimmed gains, but were still sharply higher.
The Dow Jones industrial average .DJI was up 153 points, or 1.2 percent, at 12,998.44. The Standard & Poor's 500 Index .SPX was up 25 points, or 1.8 percent, at 1,436.60. The Nasdaq Composite Index .IXIC was up 37 points, or 1.5 percent, at 2,487.78. The Nasdaq had risen as much as 3 percent shortly after the open.
Global stock markets roared back to life on Friday after the Fed's move, reversing some of their losses from Thursday's wild day.
But Japan's benchmark Nikkei average .N225 didn't get the benefit of the Fed's decision, which came hours after Tokyo's Friday trading ended. The Nikkei sank more than 5 percent on Friday, its biggest one-day loss since the September 11 attacks in 2001. The yen's surge on Thursday hurt the shares of Japan's big exporters, including Toyota. The Nikkei plunged 874.81 points, or 5.4 percent, to end at 15,273.68, its lowest close since August 7, 2006.
Europe's FTSEurofirst 300 index .FTEU3 rose 2.3 percent, ending at 1,473.49, reversing its decline earlier in the session to a 2007 low of 1,426.51.
Britain's leading FTSE-100 index .FTSE had its biggest one-day percentage gain since early 2003, ending Friday's session up 3.5 percent at 6,064.2.
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