* CPI report supports Fed's low interest rate pledge
* Inflation report soothes world stocks and bonds
* Dollar off highs but maintains strength on Fed move
(Adds New York midday trade)
By Herbert Lash and Al Yoon
NEW YORK, Feb 19 (Reuters) - Stocks and bonds edged higher
worldwide on Friday after a benign U.S. inflation report took
the sting out of a surprise rise in a Federal Reserve emergency
lending rate for banks.
The U.S. dollar held broad gains that sent it to an
eight-month high against a currency basket, on the back of the
Fed's decision to raise the discount rate late on Thursday. For
details see: []
The Fed's announcement after U.S. markets closed on
Thursday that it raised the discount rate to 0.75 percent from
0.5 percent, caught investors off guard. It was the Fed's first
move on interest rates since December 2008. []
The move initially pushed global stocks and commodity
prices lower.
But on Friday the government reported that U.S. consumer
prices excluding food and energy fell for the first time since
1982, supporting the Fed's contention it could keep its
benchmark interest rate low for an "extended period." For now,
the report silenced critics claiming that government stimulus
spending and huge deficits would result in faster inflation,
unless controlled with interest rates.
"The short-term fear of rising interest rates and inflation
has been put to bed," said Keith Springer, president of Capital
Financial Advisory Services in Sacramento, California, who sees
deflation as the bigger worry. "People have confidence in (Fed
Chairman Ben) Bernanke."
The Dow Jones Industrial Average <> rose 32.43 points,
or 0.31 percent, to 10,425.33. The Standard & Poor's 500 Index
<.SPX> increased 4.16 points, or 0.38 percent, to 1,110.91 and
the Nasdaq Composite Index <> climbed 5.21 points, or 0.23
percent, to 2,246.92.
U.S. stocks had initially dipped on Friday, but later
rebounded as investors saw the Fed's rate move as a sign of
strength in the economy.
"If the Fed thought it was necessary to raise interest
rates to remove some of the accommodation, that should be taken
as good news because it would suggest a recovering economy and
a financial system that can withstand higher interest rates,"
said Charles Lieberman, chief investment officer of Advisors
Capital Management, LLC in Paramus, New Jersey.
Industrial shares were among top gainers. Manufacturer
United Technologies <UTX.N> rose 1 percent to $68.77 and plane
maker Boeing <BA.N> climbed 1.6 percent to $63.93.
European shares hit their highest close in three weeks as
they rose for a fifth straight session. The FTSEurofirst 300
<> index rose 0.43 percent to 1,026.05, and European
banks recovered some earlier losses.
The MSCI world equity index <.MIWD00000PUS> declined 0.17
percent, recovering from session lows but retreating from a
two-week peak hit on Thursday.
The dollar gained against a basket of major currencies,
with the U.S. Dollar Index <.DXY> up 0.58 percent at 80.868.
Currency traders maintained the Fed's decision as a signal
the U.S. central bank was closer to tightening its benchmark
rate, despite Fed assurances to the contrary. It could also be
seen as Bernanke merely ending the easing of monetary policy,
Capital Financial's Springer said.
"The markets are taking this as a clear step towards
normalization in monetary policy," said Meg Browne, a currency
strategist at Brown Brothers Harriman in New York.
"If you combine the Fed actions with the fundamentals of
the U.S. economy and contrast it with the situation in Europe,
dollar buying is more than justified."
The euro <EUR=> dipped 0.48 percent to $1.3548. Against the
yen, the dollar <JPY=> gained 0.72 percent to 91.88.
The euro <EUR=> earlier fell to a nine-month low against
the dollar, at around $1.3444, but trimmed losses after St.
Louis Federal Reserve President James Bullard said market
expectations for a rate hike this year were "overblown."
[]
Sterling fell to a nine-month low against the dollar at
$1.5345 <GBP=>.
Shorter-term U.S. bond yields were supportive of the
dollar. The yield on the two-year U.S. Treasury note
<US2YT=RR>, which is sensitive to policy rates, rose to a
one-month high of 0.9279 percent.
Yields on benchmark 10-year U.S. Treasury notes <US10YT=RR>
were little changed at 3.80 percent.
The euro zone's benchmark two-year Schatz yield <EU2YT=RR>
hit a one-week high of 1.011 percent, bouncing off a euro
lifetime low plumbed during the previous session.
In energy and commodities prices, U.S. light sweet crude
oil <CLc1> rose 61 cents, or 0.77 percent, to $79.67 per
barrel,, and spot gold prices <XAU=> fell $3.20, or 0.28
percent, to $1120.30.
The Reuters/Jefferies CRB Index <.CRB> gained 1.07 points,
or 0.39 percent, to 277.22.
(Reporting by Angela Moon and Vivianne Rodrigues in New York
and Ian Chua, William James and Jan Harvey in London; Writing
by Herbert Lash and Al Yoon; Editing by Leslie Adler)
