NEW YORK (Reuters) - Global equity markets rose and the dollar strengthened against the yen on Monday on expectations the Federal Reserve will reinforce its commitment this week to supporting the U.S. economic recovery.
But U.S. stocks pared gains late in the session as confidence eroded that the Fed chairman, Ben Bernanke, will provide investors with a clearer view on the U.S. central bank's monetary policy at the end of its two-day meeting on Wednesday.
The Financial Times reported that the Fed was likely to signal that a move to taper its bond-buying program was close.
Wall Street had rallied more than 1 percent earlier in the session, recovering much of last week's losses.
"We're held hostage in front of comments about what the direction for stimulus is, and the market is always more volatile when it is in front of the information flow," said Dan Veru, chief investment officer at Palisade Capital Management LLC in Fort Lee, New Jersey, which oversees $3.8 billion.
The Fed meeting has taken on greater significance since Bernanke said in May that the U.S. central bank may decide to taper its stimulus measures meetings if the economy gains momentum.
Those comments halted a stock market rally and sparked a surge in Treasuries yields while igniting a dramatic uptick in volatility as investors tried to gauge the effects of a reduction by the Fed in its asset purchase program. The Fed's bond-buying program, which is the equivalent of pumping money into the economy, has been a boon for equity markets.
"The chairman will probably say something to the effect of, The Fed will use every means at its disposal to make sure the economic growth we've seen continues," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.
The Dow Jones industrial average .DJI closed up 109.67 points, or 0.73 percent, at 15,179.85. The Standard & Poor's 500 Index .SPX rose 12.31 points, or 0.76 percent, at 1,639.04. The Nasdaq Composite Index .IXIC gained 28.58 points, or 0.83 percent, at 3,452.13.
The market extended sharp early gains after data showed U.S. homebuilder sentiment jumped in June, rising above the 50 mark that indicates that more builders see market conditions as favorable than poor for the first time since the start of the housing crisis. Housing is considered key to the economic recovery.
"The market is beginning to adjust itself to an eventual trimming from the Fed toward the beginning of next year," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
The FTSEurofirst 300 index .FTEU3 of top European shares rose 0.72 percent to close at 1,184.36, while MSCI's all-country world equity index .MIWD00000PUS rose 0.86 percent.
Despite the recovery, the rally for some did not look wholly convincing. The FTSEurofirst 300 is still down about 6 percent from its 2013 peak of 1,258.09 struck in late May.
"The rallies look corrective in nature. We don't see any new money participating in it," said Peter Rice, the strategy head for Logic Investments. "If anything, the risk still remains to the downside."
A report from the New York Fed that showed growth in New York state manufacturing picked up in June also supported U.S. stocks, but the details were less encouraging as new orders and employment fell to their lowest levels in five months.
The dollar rose against the yen for the first time in five trading sessions as stock markets gained worldwide. Japan's Nikkei index .N225 jumped 2.7 percent.
But traders said range-trading is likely to dominate until the Fed's policy announcement on Wednesday.
The dollar briefly extended its gains after the New York state manufacturing report topped economists' expectations.
"The dollar has been selling off over the last week or so, so I think it probably has more room to gain than to lose," said John Doyle, currency strategist at Tempus Inc in Washington.
The dollar rose 0.48 percent to 94.52 yen. The euro rose 0.15 percent to $1.3366.
Treasury prices pared early gains. The benchmark 10-year U.S. Treasury note fell 13/32 in price to yield 2.1763 percent.
Brent crude oil futures hit a 10-week high close to $107 a barrel as tensions rose in the Middle East, but prices finished slightly lower after a late selloff in U.S. gasoline futures.
Brent crude oil futures for August fell 46 cents to settle at $105.47 a barrel. U.S. light crude oil futures settled down 8 cents at $97.77.
U.S. Comex gold for August delivery settled down $4.50 at $1,383.10.
Reporting by Herbert Lash; Editing by Dan Grebler, Nick Zieminski and Leslie Adler