* World equities rally, but caution curbs U.S. gains
* U.S. dollar rallies from six-week lows vs euro
* Oil rises above $65 on equity rally, then turns lower
* Bond prices rise on Bernanke's bearish comments
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, July 21 (Reuters) - Global stocks and crude oil
edged higher on Tuesday as better-than-expected earnings offset
unease about some dour corporate outlooks and fed hopes for a
recovery that could revive world demand and the economy.
The dollar rebounded from six-week lows against the euro on
Federal Reserve Chairman Ben Bernanke's cautious assessment of
the U.S. economy, reviving the greenback's safe-haven appeal.
U.S. Treasury prices rose sharply after Bernanke indicated
the economy is too weak for the Fed to fold its quantitative
easing program any time soon. He said benchmark interest rates
would remain low for some time, squashing fears of inflation.
Investors were encouraged by another round of strong profit
reports from bellwethers that included drugmaker Merck & Co
<MRK.N>, but reality dashed that optimism when equipment maker
Caterpillar Inc <CAT.N> warned the current quarter could be
tough.
World stocks hit a 9-month high and emerging market debt
spreads with U.S. Treasuries <11EMJ> were the narrowest in 10
months earlier in the session, but Bernanke's testimony before
a congressional panel soured some of the euphoria.
Improved sentiment toward the global economy vaulted copper
to a fresh nine-month high, while oil hit a two-week high above
$65 a barrel before paring gains after Bernanke's comments.
The Fed chief said mounting joblessness, slumping home
values and tight credit were likely to curb consumer spending
-- a major driver of U.S. economic growth and corporate
profits. For details, see [].
The Dow Jones industrial average <> closed up 67.79
points, or 0.77 percent, at 8,915.94. The Standard & Poor's 500
Index <.SPX> added 3.45 points, or 0.36 percent, at 954.58. The
Nasdaq Composite Index <> gained 6.91 points, or 0.36
percent, at 1,916.20.
European stocks rose for a seventh straight session, led by
mining and energy shares. The FTSEurofirst 300 <> index
of top European shares advanced 0.8 percent to 888.18 -- its
highest close since Jan. 6. The FTSE 100 <> closed 37.55
points or 0.9 percent higher at 4,481.17 in London.
"I think as much as anything there's a bit of a momentum
effect, which has given our markets a bit of a push," said
Richard Hunter, head of UK equities at Hargreaves Lansdown.
Bernanke's cautious tone threw the dollar a lifeline,
especially against the euro, which had earlier climbed to its
highest since early June, said Andrew Wilkinson, a senior
analyst at Interactive Brokers in Greenwich, Connecticut.
"His bottom-line assessment that the U.S. economy is still
nowhere near ready for a policy reversal flew in the face of
equity market investors who have been busily discounting a
return to growth," Wilkinson said.
The dollar was down against a basket of major currencies,
with the U.S. Dollar Index <.DXY> down 0.11 percent at 78.819.
The euro <EUR=> was down 0.05 percent at $1.4219. Against
the yen, the dollar <JPY=> was down 0.49 percent at 93.73.
Bonds rose on Bernanke's tame inflation comments, as
inflation tends to erode the value of bonds over time.
"They (the Federal Reserve) expect inflation to be
contained, benign, and capped over the next few years," said
Bill O'Donnell, head of U.S. Treasury strategy at RBS
Securities. "What Bernanke expects out of the economy in the
coming few years is all bond-friendly."
The benchmark 10-year U.S. Treasury note <US10YT=RR> was up
29/32 in price to yield 3.49 percent. The 2-year U.S. Treasury
note <US2YT=RR> was up 3/32 in price to yield 0.93 percent.
Oil markets reacted to results from Caterpillar and Merck
that many analysts took as a sign of improving demand.
U.S. crude <CLc1> gained 74 cents to settle at $64.72 a
barrel, after climbing to a two-week high of $65.53. London
Brent <LCOc1> rose 43 cents to $66.87.
Bullish sentiment in copper was driven by longer-term
prospects for demand. Prices later ebbed.
Copper for September delivery <HGU9> in New York ended down
1.80 cents at $2.4510 a pound.
U.S. gold futures ended slightly lower in quiet trade
Gold for August delivery <GCQ9> settled down $1.90 at
$946.90 an ounce in New York.
Asian shares edged up to another 10-month peak after strong
company earnings. The MSCI index of Asia-Pacific shares outside
Japan <.MIAPJ0000PUS> edged up 0.2 percent. Japan's Nikkei
average <> rose 2.7 percent.
(Reporting by Rodrigo Campos, Gertrude Chavez-Dreyfuss and
Burton Frierson in New York, Kirsten Donovan, Barbara Lewis and
David Sheppard in London and Peter Starck in Frankfurt; Writing
by Herbert Lash; Editing by James Dalgleish)
