(Adds close of U.S. markets)
* U.S., European stocks rally after tame U.S. CPI reading
* Dollar has biggest weekly gain in three years
* Oil retreats, U.S. bonds rise on muted rate outlook
By Herbert Lash
NEW YORK, June 13 (Reuters) - U.S. stocks rose about 1
percent and the dollar posted its biggest week of gains in
three years on Friday after retreating oil prices and a tame
reading of core U.S. consumer prices eased inflation fears.
The CPI data alleviated concerns that inflation pressures
could soon force the Federal Reserve to hike interest rates,
sending U.S. government debt higher. Excluding food and energy,
core CPI was unchanged in May at an annual 2.3 percent rate.
Oil prices dropped almost $2 on a report that Saudi Arabia
was considering ramping up production to stem crude's record
rally to peaks near $140 a barrel.
Investors snapped up a broad range of stocks, including
beaten-down financial shares, on the view corporate profits and
a flagging economy will gain from the benign inflation data,
which should allow the Fed to keep rates steady.
"There was concern earlier in the week that CPI would be
out of range, but it came in within expectations and that was a
relief," said Bucky Hellwig, senior vice president at Morgan
Asset Management in Birmingham, Alabama. "We saw the market
respond favorably."
The Dow Jones industrial average <> gained 165.77
points, or 1.37 percent, to 12,307.35. The Standard & Poor's
500 Index <.SPX> added 20.14 points, or 1.50 percent, to
1,360.01. The Nasdaq Composite Index <> advanced 50.15
points, or 2.09 percent, to end at 2,454.50.
Despite the day's rally, the broad Standard & Poor's 500
index and the Nasdaq ended the week lower, while the Dow Jones
industrial average rose slightly.
Microsoft Corp <MSFT.O> was the biggest contributor to the
tech-rich Nasdaq and the S&P 500, gaining 2.6 percent to
$28.97. Exxon Mobil <XOM.N> was the next biggest contributor,
rising 1 percent to $87.92.
U.S. crude oil <CLc1> settled down $1.88 at $134.86 a
barrel, while Brent crude <LCOc1> settled $1.84 lower at
$134.25 a barrel.
Microsoft ended talks to buy Yahoo Inc <YHOO.O> on
Thursday, bringing relief to investors who saw the bid as a
risky move. Yahoo, however, agreed to an advertising
partnership with Microsoft rival Google Inc <GOOG.O>.
Shares of Google were up 3.2 percent at $570.54. Analysts
at Sanford C. Bernstein lifted their price target on both Yahoo
and Google shares.
Yahoo fell almost 1 percent to $23.29.
Shares of Lehman Brothers Holdings Inc <LEH.N> jumped 14
percent, snapping a five-day losing streak, as some
short-sellers unwound their positions ahead of the weekend.
European stocks, led by the financial sector, tracked Wall
Street's rally as declining oil prices and U.S. CPI data eased
inflation concerns.
Among top percentage gainers in the financial sector, HBOS
<HBOS.L> soared 13.7 percent, while Swiss lender UBS <UBSN.VX>
jumped 5.2 percent.
Commerzbank <CBKG.DE> added 5.9 percent and Dresdner Bank
<ALVG.DE> rose 4.1 percent after a source from Commerzbank's
supervisory board said the two banks are in advanced merger
talks.
The FTSEurofirst 300 <> index of top European shares
rose 0.5 percent to 1,267.36 points, reversing early losses
that had pushed the index to a low of 1,247.54. It was the
second day of advances after a six-day losing streak.
The dollar rose on currency market expectations of higher
U.S. interest rates following news that soaring gasoline and
energy prices drove up non-core U.S. consumer prices in May at
the fastest rate since November.
The dollar had its best week in more than three years
against major currencies, while the euro ended the week 2.7
percent weaker against the dollar, its biggest weekly slide
since January 2005.
The U.S. Dollar Index <.DXY> finished up 0.38 percent at
74.097. Against the yen, the dollar <JPY=> rose 0.25 percent at
108.20.
The euro <EUR=> fell 0.52 percent at $1.5365.
The main driver for the dollar has been inflation. Surging
energy costs have sparked tough talk from Treasury and Fed
officials, including Chairman Ben Bernanke, who said a weak
dollar was contributing to import price inflation.
"Policy-makers are more focused on inflation than growth at
the moment, and that is dollar supportive," said Shaun Osborne,
chief currency strategist at TD Securities in Toronto.
Oil fell after the Middle East Economic Survey reported
Saudi Arabia is considering bringing output to near record
levels of around 10 million barrels per day ahead of a meeting
of producer and consumer nations on June 22.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
12/32 to yield 4.26 percent. The 30-year U.S. Treasury bond
<US30YT=RR> fell 20/32 to yield 4.80 percent.
Asian stocks inched up, with Japan's Nikkei share average
<> closing 0.6 percent higher, though it posted its
largest weekly drop in three months.
The MSCI index of Asian equities <.MIAS00000PUS> was down
6.2 percent this week, the largest decline since the week of
Aug. 19.
(Reporting by Ellis Mnyandu, John Parry and Nick Olivari in
New York and Ian Chua, Santosh Menon, Jan Harvey and Rebekah
Curtis in London
(Reporting by Herbert Lash; Editing by Richard Satran)
