Stocks eked out gains and U.S. Treasuries prices slumped on Tuesday after the Federal Reserve showed no signs of curtailing its economic stimulus measures and U.S. retail sales data signaled an accelerating economic recovery.

The dollar edged higher against the euro and the yen after the Fed modestly upgraded its evaluation of the U.S. economic recovery and reaffirmed its commitment to purchase $600 billion in government bonds to boost the economy.

The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment, the Fed said in a statement at the conclusion of a one-day meeting.

The Dow Jones industrial average touched a more than two-year high, and world stocks inched closer to overall two-year highs. Benchmark U.S. Treasury 10-year yields hit their highest levels in since May on signs of accelerating economic growth.

The government on Tuesday reported that U.S. retail sales rose for a fifth straight month, and the producer price index, a measure of business costs, increased more than expected, seen as a positive sign of demand.

I'm slightly disappointed that the (Fed) doesn't see the world in the same light that investors do, said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Connecticut.

The Fed continues to say that the outlook for employment and spending isn't as strong as the market perceives it.

Investors also kept their sights on a deal worked out between U.S. President Barack Obama and Republican lawmakers to extend tax cuts, jobless benefits and a payroll tax credit, which is expected to also boost the economy.

Wall Street did temporarily turn negative, weighed by declining bank shares after the Fed statement as hurt by a plunge in the stock of Best Buy Inc , the top U.S. electronics retailer that is seen a bellwether in consumer electronics. Best Buy shares fell 15 percent after it reported a drop in quarterly profit and sales and cut its full-year outlook, citing weak demand in its key U.S. market.

The Dow Jones industrial average <.DJI> was up 47.98 points, or 0.42 percent, at 11,476.54. The Standard & Poor's 500 Index <.SPX> was up 1.13 points, or 0.09 percent, at 1,241.59. The Nasdaq Composite Index <.IXIC> was up 2.81 points, or 0.11 percent, at 2,627.72.

The S&P 500 index is up 6 percent since November 29.

U.S. Treasuries extended losses after the Fed statement, adding to a sharp sell-off as the tax deal sparked concern over faster growth and a widening federal budget gap. U.S. Treasury 10-year yields, which influence consumer and corporate borrowing costs, rose to 3.44 percent from 3.28 percent late Monday.


European shares closed higher for a seventh straight session, reversing early losses after the U.S. retail sales data reinforced optimism about the pace of economic recovery. The FTSEurofirst 300 Index <.FTEU3> finished up 0.3 percent in thin volume.

The MSCI world equity index <.MIWD00000PUS> edged up 0.24 percent, nudging closer to a two-year high set in November. The Thomson Reuters global stock index <.TRXFLDGLPU> rose 0.4 percent, and emerging stocks <.MSCIEF> added 0.6 percent.

Currencies fluctuated throughout the day as the dollar temporarily slipped, bouncing back after Fed's announcement. The dollar gained 0.15 percent against a basket of major trading partner currencies <.DXY> and 0.35 percent against the Japanese yen to 83.69. The euro declined 0.07 percent to $1.338.

As the dollar strengthened, spot gold pared gains after rallying to its highest in a week, closing up $1.70, or 0.12 percent, at $1394.80 an ounce.

U.S. crude oil futures also slid after the Fed's announcement, settling down 33 cents, or 0.33 percent, at $88.28 per barrel on the New York Mercantile Exchange.

(Additional reporting by Angela Moon and Karen Brettell in New York and Melanie Burton in London; Editing by Leslie Adler)