* World shares extend gains, U.S. stocks surge
* U.S. government debt reverses losses to trade higher
* Dollar pares gains against euro, rises against yen
* Oil extends gains after Fed announcement
By Herbert Lash
NEW YORK, Dec 18 (Reuters) - Global equity markets extended gains and the dollar fell on Wednesday after the Federal Reserve finally began to wind down its economic stimulus, answering the question on tapering that has loomed over markets and sending a signal that the U.S. recovery was well on its way.
The benchmark S&P 500 and the Nasdaq rebounded after the Fed said it would reduce its monthly asset purchases by $10 billion to $75 billion.
The euro reversed losses to trade higher against the dollar, while the greenback hit session highs against the yen. Spot gold traded up slightly, and oil prices extended earlier gains.
The benchmark 10-year U.S. Treasury also reversed losses to trade higher.
“We were surprised about the decision to taper, but given the news this (market move) was as we expected. It was almost a no-lose situation with the uncertainty removed from the market place,” said Erik Davidson, deputy chief investment officer at Wells Fargo Private Bank in San Francisco.
“The reason the market is up as it is is this is ‘bad news’ investors have been waiting for and is finally out of the way. It is fodder for possibly better markets because it affirms the economy is healing.”
MSCI’s all-country world equity index rose extended gain, rising 0.83 percent.
The Dow Jones industrial average rose 150.14 points, or 0.95 percent, to 16,025.4. The S&P 500 lost 3.98 points, or 0.22 percent, to 1,777.02 and the Nasdaq Composite added 7.646 points, or 0.19 percent, to 4,031.326.
Before the announcement, stocks in Europe rose. The pan-European FTSEurofirst 300 index of leading regional shares advanced after think-tank Ifo reported German business morale in December was at its highest since April 2012.
The FTSEurofirst 300 rose 0.85 percent to close at 1,259.06 points, and the euro zone’s blue-chip Euro STOXX 50 index jumped 1.13 percent to 2,975.09.
The 10-year Treasury note rose 4/32 in price to yield 2.8281 percent.
German bonds initially rose after news that Germany plans to cut debt issuance to the lowest level since 2007 next year. But gains were limited as investors awaited the Fed’s decision.
German Bund futures settled down 15 ticks at 140.14, after earlier rising as high as 140.49.
The euro last traded up 0.2 percent at $1.3795, while the dollar rose 0.59 percent against the yen to 103.27 yen.
Brent crude oil futures shrugged off the Fed’ decision to begin tapering, maintaining its gains that widened its premium to U.S. crude.
Brent crude rose $1.06 to $109.50 a barrel, and U.S. oil settled up 58 cents at $97.80 a barrel.