* Dollar falls after Fed signals to act to boost economy
* Fed to buy more long-term Treasuries
* Signs of slowing growth in China weigh on stocks,
commodities
(Updates with Federal Reserve meeting)
By Manuela Badawy and Al Yoon
NEW YORK, Aug 10 (Reuters) - U.S. stocks pared earlier
steep losses and government debt rallied on Tuesday after the
Federal Reserve signaled it would act as necessary to preserve
the fading economic recovery.
The dollar lost luster as a haven from risk, shedding early
gains versus the euro and declining against the yen, while
crude oil prices pared losses.
The Fed said it would begin funneling proceeds from its
maturing mortgage bonds into longer-term government debt in an
effort to support a sputtering economic recovery.
The move marks an important policy shift for the Fed, which
just months ago had been debating how to start winding up its
various monetary stimulus programs. Fed officials also offered
a more gloomy outlook on the U.S. economy.
The Fed, which left benchmark overnight interest rates
steady in a zero to 0.25 percent range, also renewed its pledge
to keep them low for an extended period, as widely expected.
"What this is telling the market is, 'We're going to do
everything and anything we can to make sure we've put a
backstop on any possible risk of a double dip'," said Burt
White, managing director and chief investment officer at LPL
Financial in Boston. "This is exactly what the market was
hoping for."
Stocks and commodity prices earlier had slumped after a
report of weak Chinese imports triggered concern of slowing
growth in China, which has been an engine of growth for the
world economy.
The Dow Jones industrial average <> was down 36.86
points, or 0.34 percent, at 10,661.89. The Standard & Poor's
500 Index <.SPX> was down 4.45 points, or 0.39 percent, at
1,123.34. The Nasdaq Composite Index <> was down 21.69
points, or 0.94 percent, at 2,284.00.
The S&P rebounded back above its 200-day moving average.
All three major indexes had been down more than 1 percent
before the Fed's decision and on evidence that China's rapid
growth was easing.
The S&P materials index <.GSPM> was down 0.9 percent and
the energy index <.GSPE> was off 0.8 percent.
In currency markets, the Fed's announcement weighed on the
dollar.
The downgrade to the economic outlook "is a problem for the
dollar in general," said Brian Dolan, chief strategist at
Forex.com in Bedminster, New Jersey, while the move to invest
in long-dated Treasury debt has pushed down U.S. bond yields,
making the dollar less attractive to global investors.
The euro rose to $1.3223 <EUR=>, flat on the day, after
falling as low as $1.3075 earlier. The dollar was down 0.8
percent at 85.22 yen <JPY=>, not far from a 15-year low around
84.81 yen. The dollar got support against the yen earlier after
the Bank of Japan held off on new steps to weaken the
currency.[]
FED MOVE STOKES BID FOR BONDS
U.S. Treasuries prices rallied, extending earlier gains,
after the Federal Reserve said it will deploy principal
payments from its mortgage holdings to buy long-dated
government debt.
The price on the 30-year U.S. government bond <US30YT=RR>
jumped 1-13/32 in the cash market. Its yield hit a session low
of 3.95 percent, compared with 4.02 percent late on Monday.
U.S. crude oil futures ended with pared losses after the
Fed's pledge to maintain its policy of low interest rates for
an extended period.
On the New York Mercantile Exchange, September crude <CLU0>
settled down $1.23, or 1.51 percent, at $80.25 a barrel. Before
the Fed announcement, crude prices were down about $1.80.
Oil prices were stung by a slowdown in oil imports by
China, the world's second largest energy consumer, which
underlined investors' fears that the global economic recovery
is losing momentum.[]
Although China's trade surplus surged in July to an
18-month high as exports rose, a government-induced slowdown in
investment took a tool on imports.
"China is certainly the global growth engine for almost all
parts of the world, especially to the United States. Their
macro data is influencing the psychology of investors of all
assets here," said Craig Peckham, equity trading strategist at
Jefferies & Co in New York.
World stocks measured by the MSCI All-Country World Index
<.MIWD00000PUS> dropped 1.2 percent, and the Thomson Reuters
global stock index <.TRXFLDGLPU> fell 1.2 percent.
The MSCI emerging markets benchmark <.MSCIEF> was down
1.18, with China's Shanghai Composite Index down 3 percent
after data showed Chinese import growth below expectations,
pointing to slowing domestic demand and economic activity.
In Europe, the FTSEurofirst 300<> index closed 0.9
percent lower ahead of the Fed's policy statement, with miners
falling heavily.
(Additional reporting by Chris Reese, Angela Moon and Wanfeng
Zhou; Editing by Leslie Adler)
