NEW YORK (Reuters) - The dollar weakened and world stocks rose on Wednesday after the U.S. Federal Reserve extended its pledge on maintaining interest rates at ultra-low levels until at least late 2014, much later than markets had expected.
The Fed’s announcement at the close of its two-day policy meeting followed other news earlier in the day that supported risk appetite, including Apple’s stellar results and strong German economic data, and helped offset lingering concerns about the outcome of Greece’s debt talks.
Prices of gold and U.S. government debt rallied on the Fed’s statement on rates and on comments by the bank’s chairman, Ben Bernanke, who left the door open to further monetary stimulus if the economy deteriorates this year.
In an unprecedented step toward greater transparency, the Fed also announced that it was adopting an inflation target, setting it at 2 percent. And for the first time, it released the individual policymakers’ forecasts for the federal funds rate, the rate at which banks lend to each other. The forecasts showed most Fed members expect rates to rise only around 2014.
“This is dollar negative,” said Brian Dolan, chief strategist at Forex.com at Bedminster, New Jersey. “Extending low rates until late 2014 is longer than markets were expecting.”
The euro rose 0.6 percent against the dollar to $1.311, its highest level in nearly five weeks. The single currency was also supported by a report showing German business sentiment rose for the third month in a row in January, beating market expectations.
Pressure will likely remain on the euro, however, as investors worry the European Central Bank may have to write down its holdings of Greek debt, which would crimp its ability to purchase debt from other troubled peripheral euro zone countries.
“Uncertainty over the Greek debt talks and disappointment that there has still been no deal is spoiling the party for the euro,” said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.
The Greek government said it hopes to complete talks on a deal with its private creditors as early as this week, despite euro finance ministers’ rejection of an initial plan.
The Fed’s low interest rate forecast, coupled with Apple’s blow-out earnings, allowed Wall Street to resume a rally that had been halted in the morning by euro-zone debt fears.
The Dow Jones industrial average .DJI closed up 83.10 points, or 0.66 percent, at 12,758.85. The Standard & Poor's 500 Index .SPX gained 11.41 points, or 0.87 percent, to 1,326.06. The Nasdaq Composite Index .IXIC climbed 31.67 points, or 1.14 percent, to 2,818.31.
“What caught the market off guard was obviously the fact they are going to keep rates lower for longer,” said John Canally, investment strategist at LPL Financial in Boston.
The adoption of a 2 percent inflation target also “moves the ball slightly down the field” for possible additional quantitative easing measures, Canally added.
Shares of the Apple (AAPL.O) closed up 6.2 percent at $446.66, after earlier hitting an all-time high of $454.45. The iPad maker announced quarterly results that blew past market expectations.
“Expectations ran rampant on the iPhone 4S’ popularity around the world, and yet December’s results reported last night were still ”staggering“ in comparison,” Brigantine Advisors said in a note.
At least 15 brokerages raised their price targets on the company’s stock, with two expecting it to touch $650 in the next 12 months.
Global stocks gained 0.47 percent according to the MSCI All-Country World index .MIWD00000PUS. But in Europe, the FTSEurofirst 300 index .FTEU3 ended 0.5 percent lower on debt fears.
Gold prices rallied 2.5 percent to above $1,700 an ounce, as the Fed’s renewed commitment to low interest rates suggested the metal could be an interesting investment alternative, especially if a sluggish economic recovery puts a lid on stock gains.
“Gold was reacting to the Fed’s guidance of historically low rates all the way until 2014, which suggests that there will be plenty of investment money around for an extended period of time,” said Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC.
Benchmark 10-year U.S. Treasuries rose 17/32 in price after the Fed’s statement, sending their yield down to 2.0034 percent.
U.S. crude oil prices closed 0.45 percent higher, at $99.40 per barrel.