* World stocks <.MIWD00000PUS> climb 2.5 pct
* Fed to buy $300 billion of long-dated Treasuries
* Dollar hits 2-month low, European credit spreads tighten
* Commodities up on hope of pick up in industrial activity
By Atul Prakash
LONDON, March 19 (Reuters) - The dollar hit a two-month low
on Thursday after its biggest one-day fall in at least 25 years
when the U.S. Federal Reserve announced it would buy long-dated
debt, a move that also lifted stock markets sharply.
The Fed's action raised risks that a sharp expansion of the
Fed's balance sheet, which has already doubled in the past six
months, would eventually lead to oversupply of the world's main
reserve currency.
U.S. Treasury yields fell and European credit spreads
tightened, but the announcement also sparked optimism that the
battered U.S. economy could soon begin to recover.
Share prices responded positively along with prices of crude
oil and industrial metals.
The Federal Reserve said it would buy $300 billion of
long-dated Treasuries over the next six months, its first
large-scale purchases of government debt since the early 1960s,
while also boosting buying of mortgage-backed securities and
agency debt in its bid to rescue the economy. []
It floated the idea of buying Treasuries some time ago but
then seemed to go cold on the idea. The sudden change of
direction took most investors completely by surprise. The move
also effectively amounts to the Fed printing money -- and is
hence bad news for the dollar.
The dollar index <.DXY>, a gauge of its performance against
a basket of major currencies, fell 1.1 percent to 82.911 after a
3 percent slide on Wednesday -- its biggest one-day drop in at
least a quarter of a century.
"It's all part of a global process of easing which is
positive for risk assets in the short-term," said Nick Parsons,
head of markets strategy at National Australia Bank.
"The one factor supporting the dollar over the last three
months has been the woeful performance of equity markets and if
this sees a lift in risk appetite ... that is absolutely,
unequivocally negative for the dollar."
World shares jumped as investors moved away from the dollar
to grab equities following the Fed announcement that sparked
optimism the battered U.S. economy could soon begin to recover.
World stocks, as measured by MSCI's all country index
<.MIWD00000PUS> climbed 2.5 percent to 202.31, while European
shares <> rose 2.2 percent. U.S. stocks rallied overnight
as investors bet the Fed's move would kick-start lending.
"The Fed is wheeling out the heavy artillery, demonstrating
a clear desire to do the utmost to drive down borrowing costs
and revive the economy, and confidence that the extreme measures
taken will be reversible swiftly as and when needed," Barclays
Wealth said in a note.
"This reinforces our view that the United States will be
among the first to emerge from the recession, even if this will
come at a cost of longer-term sub-par growth as economic
rebalancing is slow."
CREDIT DEFAULT SWAPS TIGHTEN
Financial sector European credit default swap spreads
tightened on the Fed move and after Swiss bank UBS <UBSN.VX>
announced a bond buy-back to boost its capital.
The investment-grade Markit iTraxx Europe index <ITEEU5Y=GF>
was at 186 basis points, according to data from Markit, 5 basis
points tighter than late Wednesday. The Markit iTraxx Crossover
index <ITEXO5Y=GF>, made up of 50 mostly "junk"-rated credits,
was at 1,126 basis points, 7 basis points tighter.
The U.S. is not alone in buying of government debt. The Bank
of England is buying 75 billion pounds of gilts and the Bank of
Japan on Wednesday announced it would increase its purchases of
Japanese government debt. []
The Swiss National Bank surprised markets last week with
intervention to weaken the Swiss franc as well as an interest
rate cut to fight a deep recession. The European Central Bank
may also eventually turn to non-standard policy measures.
"We'll have to see how this pans out, but ultimately the Fed
are printing paper, the UK are printing paper, the Swiss are
printing paper, the Japanese are printing paper -- they are all
at it and I don't want to buy those currencies," said David
Bloom, global head of FX research at HSBC markets in London.
"I don't believe in the argument that its going to create
economic growth and you will get portfolio flows -- forget it,
they are sorting out a crisis," he added.
10-year U.S. Treasuries hovered near a two-month high, while
commodity markets were cheered on a glimmer of hope that the
Federal Reserve's move would revive the global economy, boost
industrial activity and increase demand for oils and metals.
Oil prices <CLc1> jumped 6.3 percent to above $51 a barrel,
copper <MCU3> climbed 2.9 percent and aluminium <MAL3> rose more
than 2 percent.
Dollar weakness played into precious metals, sending gold
prices to a two week high <XAU=> as it reprised its traditional
relationship with the U.S. currency.
(Additional reporting by Kirsten Donovan and Veronica Brown;
Editing by Victoria Main)
