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NEW YORK (Reuters) - U.S. equities pushed higher on Tuesday as investors grew more confident that the Federal Reserve would temper its recent statements on the future reduction of U.S. monetary support, while still pointing to economic improvement.
The dollar .DXY slipped 0.2 percent against a basket of currencies but rose for a second day against the yen.
The Federal Reserve meeting, which started on Tuesday, has taken on greater significance since Fed Chairman Ben Bernanke said in May that stimulus could be scaled back if the U.S. economy gains momentum. The Fed will issue its policy statement on Wednesday, followed by a news conference by Bernanke.
Last month's comments threw a wrench in the stock market's rally, caused U.S. benchmark bond yields to rise and hurt the dollar. The Fed is currently buying $85 billion in bonds monthly to keep borrowing costs low and boost demand.
Wall Street ended nearly 1 percent higher, with market breadth strong even as trading volume was light. U.S. bond prices were little changed, with the benchmark 10-year Treasury yield trading at 2.185 percent.
"Stocks are higher as investors adjust to the fact that not only will the Fed not announce tapering tomorrow, but that the economy is quite capable of growing without it," said David Kelly, the chief global strategist for JPMorgan Funds in New York, which has about $400 billion in assets under management.
"There are reasons to be cautious and uncertain, but the market is still cheap and should continue to expand for a long time," he said, adding that he was overweight on cyclical groups, which are tied to the pace of growth.
The benchmark S&P 500 has surged 15 percent since the start of 2013, but the rally in stocks is expected to decelerate in the latter part of the year, putting equities only modestly beyond their record highs, a Reuters poll found.
Equity markets took little direction from data that showed U.S. consumer prices rose in May and a gauge of underlying price pressures showed signs of stabilization after a long decline. That could be encouraging to Fed policymakers who would like to see stronger inflation.
The Dow Jones industrial average .DJI gained 138.38 points, or 0.91 percent, to end at 15,318.23. The Standard & Poor's 500 Index .SPX gained 12.77 points, or 0.78 percent, to 1,651.81. The Nasdaq Composite Index .IXIC gained 30.05 points, or 0.87 percent, to 3,482.18.
European shares .FTEU3 ended down 0.1 percent. Stocks found some support in a rise in investor sentiment in Germany that suggested Europe's largest economy is on the slow road to recovery. But it was only a brief distraction ahead of the Fed.
A measure of global stock markets .MIWD00000PUS was up 0.4 percent.
The dollar gained against the Japanese yen, rising 1 percent to 95.44 yen. The euro rose 0.2 percent to $1.3397, boosted by improved German investor sentiment.
"Even if they're considering tapering moving forward, tapering isn't tightening. They're still going to be easing, they're still going to be expanding their balance sheet. They wouldn't be tightening until they start to shrink the balance sheet," said Eric Viloria, currency strategist at Forex.com in New York.
Treasuries were choppy, with bond investors focused on the Fed. Benchmark 10-year Treasuries were off 2/32 in price to yield 2.185 percent. Thirty-year bonds added 5/32 in price to yield 3.34 percent.
The looming Fed statement put a cap on gains in oil prices in sluggish trading. Brent settled up 55 cents at $106.02, while U.S. oil was up 67 cents at $98.44.
Until the Fed's policy decision, oil trading will be largely muted, said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.
"I'd expect we are going to see quiet trading between now and 23 and a half hours from now," he said.
Additional reporting by Ryan Vlastelica, Jeanine Prezioso and Wanfeng Zhou; Editing by Chizu Nomiyama and Dan Grebler