The dollar rose against the euro and the yen on Tuesday after the Fed acknowledged a slight improvement in the economy, with strong U.S. and German data boosting further boosting global optimism and driving stocks and crude oil higher.
The central bank said it expects moderate growth over coming quarters with the unemployment rate declining gradually; in January, it said it expected modest growth.
Still, in offering the upgrade to their economic outlook, policymakers cautioned that unemployment remains elevated.
The key takeaway is that the Federal Reserve's outlook on the U.S. economy has improved, specifically on the labour market. although the Fed remains guarded, said Richard Franulovich, senior currency strategist at Westpac in New York.
That said, the Fed's comments seem to suggest that QE3 (quantitative easing) is off the table for now and that is probably boosting the dollar, he added.
The dollar climbed as high as 83.08 yen after the Fed statement, an 11-month high against the Japanese currency. The euro sank 0.65 percent to $1.3067, after touching a near one-month low.
U.S. Treasury debt extended losses, with 30-year bonds trading well over a point lower in price after the Fed released its policy statement.
Benchmark 10-year notes were trading 26/32 lower in price to yield 2.13 percent, up from 2.03 percent late Monday. The notes had been trading 12/32 lower in price just prior to the release of the statement.
Global equities were also boosted by data showing that U.S. retail sales in February marked their biggest gains in five months and a monthly index from German think-tank ZEW showed analyst and investor sentiment on the economy had risen more than expected.
The S&P 500 index rose to its highest since June 2008 and the Nasdaq Composite hit its highest mark since December 2000.
The Dow Jones industrial average <.DJI> gained 168.77 points, or 1.30 percent, to 13,128.48. The Standard & Poor's 500 Index <.SPX> gained 18.73 points, or 1.37 percent, to 1,389.82. The Nasdaq Composite Index <.IXIC> gained 42.17 points, or 1.41 percent, to 3,025.83.
The FTSEurofirst 300 index <.FTEU3> of top European shares finished 1.69 percent firmer at 1,095.34, the highest close since late July.
Banks, which tend to perform well during better economic conditions, were the top performers, with the STOXX Europe 600 banking sector index <.SX7P> rising 3.3 percent to take this year's gains to 17.7 percent.
Brent and U.S. crude futures seesawed earlier in the session as hopes for better world economic growth came up against a stronger dollar and lower expectations for more easing from the Fed. But optimism over the stronger data appeared to win out.
On the New York Mercantile Exchange, crude for April delivery settled at $106.71 a barrel, up 37 cents, or 0.35 percent, after trading between $105.67 to $107.35.
In London, ICE Brent crude for April delivery settled at $126.22 a barrel, gaining 88 cents, or 0.70 percent, after trading between $125.00 and $126.79.
STOCKS, COMMODITIES COULD SEE SUPPORT
Following on the heels of Friday's strong nonfarm payrolls numbers, the retail sales number should add weight to the view the U.S. recovery is strengthening.
Robust data from economic powerhouses on either side of the Atlantic should serve to ease worries about the recovery's sustainability.
That could support riskier assets like stocks and commodities as well as growth-linked currencies like the Australian dollar, at least for the time being.
Liquidity has helped to improve sentiment in the near term, but I think there are a number of longer-term concerns in the market place and that is all to do with growth, Joshua Raymond, market strategist at City Index, said.
For a graphic comparing German ZEW, equities and GDP:
For a graphic showing components of U.S. GDP:
The expectation of a solid U.S. revival lifted the dollar against a basket of currencies <.DXY> to its highest since late January on Tuesday.
The data in America continues to grind upward, and investors can more effectively assess risk, said Stephen Wood, chief market strategist at Russell Investments in New York.
(Additional reporting by Nick Olivari and Rodrigo Campos; Editing by Leslie Adler and James Dalgleish)