The dollar jumped against the euro and the yen on Tuesday after comments by the Federal Reserve drove down expectations that it would further ease monetary policy, and U.S. stocks notched multi-year highs on optimism on the economy and after JPMorgan raised its dividend.
The U.S. central bank slightly upgraded its economic outlook in a policy statement released on Tuesday, saying it expects moderate growth over coming quarters and a gradual decline in the unemployment rate, though it said the jobless rate remains elevated.
The U.S. stock market posted its best day this year, with the dividend announcement by JPMorgan Chase & Co adding another spark to an already upbeat market, igniting a rally in bank shares.
JPMorgan, the largest U.S. bank by assets, said regulators completed stress tests of its balance sheet and approved an increase in its quarterly dividend, of a nickel to 30 cents, and stock buybacks.
That kind of put us into fourth gear here, said Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc in Boston. The financials have been such a drag on the whole market for the last couple of years.
JPMorgan's announcement came two days before the Federal Reserve was originally scheduled to announce results of stress tests for 19 U.S. bank holding companies.
Oil prices also rose on Tuesday on the Fed's outlook and on U.S. and European data that drove a new round of confidence that the global economy is on a healthy path. The reduced expectations that the Fed would sometime soon engage in a third round of quantitative easing supported the dollar.
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 is off the table for now and that is probably boosting the dollar.
The dollar hit an 11-month high against the yen, at 83.08 yen, after the Fed statement. The euro sank 0.68 percent to $1.3063, after touching a near one-month low.
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 that showed an improved economic outlook from both analysts and investors also bolstered riskier assets.
For a graphic comparing German ZEW, equities and GDP:
For a graphic showing components of U.S. GDP:
The S&P 500 closed at the highest level since June 2008. The index, already up 11 percent this year, has risen for five straight days and appears set for more gains. The Dow Jones industrial average closed at its highest since December 2007, while the Nasdaq's close was its highest since November 2000.
Banks led the way. JPMorgan surged 7 percent to $43.39 and was the Dow's top gainer. Bank of America Corp gained 6.3 percent to $8.49 while the S&P index of financial stocks <.GSPF> climbed 3.9 percent.
The Dow Jones industrial average <.DJI> gained 217.97 points, or 1.68 percent, to 13,177.68. The Standard & Poor's 500 Index <.SPX> gained 24.87 points, or 1.81 percent, to 1,395.96. The Nasdaq Composite Index <.IXIC> gained 56.22 points, or 1.88 percent, to 3,039.88.
In Europe, 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 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 settled higher on the improved economic views, which offset the stronger dollar.
On the New York Mercantile Exchange, crude for April delivery settled at $106.71 a barrel, up 37 cents, or 0.35 percent.
In London, ICE Brent crude for April delivery settled at $126.22 a barrel, gaining 88 cents, or 0.70 percent.
U.S. Treasury debt prices fell as the economic optimism dimmed the allure of safe-havens.
The 30-year U.S. Treasury debt bond fell more than a point in price after the Fed released its policy statement. The two-year Treasury yield hit its highest level since Standard & Poor's stripped the United States of its AAA-rating last August.
(Additional reporting by Nick Olivari and Ryan Vlastelica; Editing by Leslie Adler)