Stocks rally, dollar falls after U.S. data, ECB hike, hawkish Fed pause

© Reuters. FILE PHOTO: A man is reflected on an electric monitor displaying a stock quotation board outside a bank in Tokyo, Japan, June 5, 2023. REUTERS/Issei Kato/ FILE PHOTO

By Sinéad Carew and Marc Jones

NEW YORK, LONDON (Reuters) - MSCI's global index of stocks rose on Thursday to its highest level since April 2022 after strong U.S. economic data, but the dollar slid following the European Central Bank's interest rate increase a day after the Federal Reserve paused its hikes.

While U.S. jobless claims were higher than expected, retail sales unexpectedly rose in May as consumers stepped up purchases of motor vehicles and building materials, which could help to stave off a recession in the near term.

The euro hit a 15-year peak against the Japanese yen and a five-week high against the dollar after the ECB lifted interest rates to a two-decade high of 3.5% and eyed more hikes ahead.

Equities trading had been choppy on Wednesday after the Fed signaled it could follow its June pause with two more rate increases this year. But on Thursday afternoon the S&P 500 and the Nasdaq were rallying sharply and registered their highest closing levels in roughly 14 months.

Higher jobless claims helped fuel bets that the Fed would not follow through with more rate hikes. This, combined with higher-than-expected retail sales, looked like "the ingredients for a soft landing" for the U.S economy, said Irene Tunkel, chief US equity strategist at BCA Research.

"It's almost like a sweet spot," Tunkel said, also pointing to Chinese data boosting energy stocks and oil prices. "So, sentiment-wise the mood is positive."

The Dow Jones Industrial Average rose 428.73 points, or 1.26%, to 34,408.06, the S&P 500 gained 53.25 points, or 1.22%, to 4,425.84 and the Nasdaq Composite added 156.34 points, or 1.15%, to 13,782.82.

MSCI's gauge of stocks across the globe gained 1.01%.

But the dollar index, measuring the greenback against major currencies, fell 0.787%, with the euro up 1.06% to $1.0946 after earlier hitting a high of $1.09520.

The Japanese yen weakened 0.11% versus the greenback at 140.24 per dollar, while Sterling was last trading at $1.2782, up 0.96% on the day.

"Beyond the near-term outlook for rates, the U.S. dollar may be looking at a somewhat more challenging environment. The global monetary policy cycle is approaching its end game," said Shaun Osborne, chief FX strategist, said at Scotiabank in Toronto adding that the rate-cycle peak would be negative for the dollar as it would boost appetites for riskier bets.

U.S. Treasury yields were lower as investors digested the economic data and the Fed's update.

Benchmark 10-year notes were down 8 basis points to 3.718%, from 3.798% late on Wednesday. The 30-year bond was last down 3.9 basis points to yield 3.8421% while the 2-year note was last was down 6.5 basis points to yield 4.6418%.

In commodities, oil prices rose more than 3% as the dollar weakened and data showed a jump in refinery runs in top crude importer China, though a weak economic backdrop capped gains.

U.S. crude settled up 3.44% at $70.62 per barrel and Brent was at $75.67, up 3.37% on the day.

Gold prices rose from a three-month low as the dollar and bond yields fell after U.S. economic data.

Spot gold added 0.8% to $1,958.04 an ounce. U.S. gold futures gained 0.15% to $1,958.30 an ounce.