Dollar nears ten-week high on Fed views; stocks rally

By Caroline Valetkevitch

NEW YORK (Reuters) - The dollar hit is highest against the euro in nearly 10 weeks on Tuesday, while U.S. bond prices dipped as expectations grew that the Federal Reserve could raise interest rates soon.

Surprisingly strong data on U.S. new home sales in April supported the view the economy may be strong enough for the Fed to raise interest rates as early as June.

Last week, the Fed surprised investors when the central bank's meeting minutes opened the door to a rate hike as early as June.

World stock indexes rallied, led by shares of financial companies, which benefit from rising interest rates, as well as technology and other growth-oriented sectors.

The euro was down 0.7 percent against the dollar at $1.1136 and hit its lowest level since March 16.

"A re-pricing of Fed tightening expectations is the principal driver of the U.S. dollar's resurgence," said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York. "Markets will wax and wane, but generally speaking, the thrust will be toward dollar gains."

The Dow Jones industrial average closed up 213.12 points, or 1.22 percent, to 17,706.05, the S&P 500 gained 28.02 points, or 1.37 percent, to 2,076.06 and the Nasdaq Composite added 95.27 points, or 2 percent, to 4,861.06.

MSCI's all-country world stock index rose 1 percent, while the pan-European FTSEurofirst 300 index of leading regional stocks ended up 2.3 percent.

While higher borrowing costs can be a negative for the stock market, equity investors may be hopeful about prospects for the broader U.S. economy.

"The market is starting to contemplate the idea that Fed rate hikes this year are A: more likely, and B: not inherently bad in and of themselves," said Bill Merz, an investment strategist with U.S. Bank Wealth Management.

In the U.S. Treasury market, the rally in stocks and robust new home sales data weighed on bond prices. The two-year yield touched two-month highs, but prices bounced off session lows after robust demand at a $26 billion note auction.

Benchmark 10-year Treasury notes were down 5/32 in price for a yield of 1.859 percent, up 2 basis points from Monday.

Investors will watch Fed Chair Janet Yellen's appearance at a panel at Harvard University on Friday, the same day as they take in a revised estimate of U.S. first-quarter growth.

Oil prices gained as investors anticipated a weekly drawdown in U.S. crude inventories that they hoped would boost prices closer to $50 a barrel.

Brent futures finished up 0.5 percent at $48.61, ending a four-day slide, while U.S. crude futures rose 1.1 percent to settle at $48.62 a barrel.

The strong dollar took a toll on gold, which fell to its lowest in more than four weeks. Spot gold was down 1.5 percent at $1,229.25 an ounce, off an earlier low of $1,227.70.

(Additional reporting by Sam Forgione and Saqib Ahmed in New York and Noel Randewich in San Francisco; Editing by David Gregorio and Cynthia Osterman)