Dollar rallies after data, Fed minutes; world shares hold record highs

By Stephanie Kelly

NEW YORK (Reuters) - The U.S. dollar advanced against key currencies on Wednesday after the release of minutes from last month's Federal Reserve meeting, while world shares smashed records and Wall Street closed higher on investor optimism in the new year.

The dollar index rose 0.34 percent, with the euro down 0.38 percent to $1.2011.

The euro fell to a session low versus the dollar after the release of minutes from last month's Federal Reserve meeting. During the meeting, Fed policy makers decided to raise short-term interest rates for a third time in 2017.

According to the minutes, policymakers showed worry over the fate of currently low inflation and saw recent tax changes as providing a boost to consumer spending.

Fed officials also discussed the possibility that the Trump administration's tax cuts or easy financial conditions could cause inflation pressures to rise, leading to some dollar-buying, analysts said.

"The debate is the same. You have strong growth and low unemployment on one side and surprisingly low inflation on the other side," said Stephen Stanley, chief economist at Amherst Pierpont Securities in Stamford, Connecticut.

"They have been taking a middle-of-the-road on their policy approach, gradually raising interest rates and unwinding the balance sheet. They will continue the same tack."

The dollar had already snapped a three-week losing streak earlier on Wednesday, after stronger-than-forecast U.S. manufacturing and construction data.

The Japanese yen weakened 0.18 percent versus the greenback at 112.50 per dollar, while Sterling was last trading at $1.3512, down 0.54 percent on the day.

Benchmark U.S. Treasury 10-year notes last rose 6/32 in price to yield 2.4452 percent, from 2.465 percent late on Tuesday.

The 30-year bond last rose 18/32 in price to yield 2.7824 percent, from 2.81 percent late on Tuesday.

Hawkish comments from two European Central Bank officials had sent yields higher on Tuesday, with the 10-year German Bund yield hitting a two-month peak and the five-year U.S. yield reaching its highest level since April 2011.

WORLD STOCKS RISE

MSCI's gauge of stocks , which tracks shares in 47 countries, gained 0.46 percent. In 2017, the index's best year since 2009, it set scores of record highs and rose by one-fifth in value.

The benchmark S&P 500 breached the 2,700-mark for the first time on Wednesday, while the Nasdaq Composite and the Dow Jones Industrial Average also broke records as tech stocks climbed amid indications of strong economic growth in the United States and abroad.

Wall Street held its gains after the release of minutes from the Fed's policy meeting last month.

"I think pretty much everyone sort of thinks the Fed is on track to do what it has been saying it is going to do, which is not do anything this month and then raise at their mid-March meeting. Currently there is about a 75-percent probability for a March hike. I don't think anything that was said was outside of that assumption," said Randy Frederick, vice president of trading at derivatives at Charles Schwab in Austin, Texas.

The Dow Jones Industrial Average rose 98.67 points, or 0.4 percent, to 24,922.68, the S&P 500 gained 17.25 points, or 0.64 percent, to 2,713.06 and the Nasdaq Composite added 58.63 points, or 0.84 percent, to 7,065.53.

In Europe, shares closed higher after a rising dollar boosted exporters and Wall Street records lifted optimism as new European market rules took hold. The pan-European STOXX 600 index <.STOXX> was up 0.48 percent.

Emerging market stocks rose 0.53 percent.

Spot gold dropped 0.4 percent to $1,313.43 an ounce. U.S. gold futures fell 0.09 percent to $1,314.90 an ounce.

Oil prices hit fresh two-and-a-half year highs, with a sixth day of unrest in OPEC member Iran and strong economic data from the United States and Germany spurring buying.

U.S. crude rose 2.34 percent to $61.78 per barrel and Brent was last at $67.89, up 1.98 percent on the day.

(Reporting by Stephanie Kelly; Additional reporting by Abhinav Ramnarayan and Oleg Vukmanovic in London, Sruthi Shankar in Bengaluru, Richard Leong, Caroline Valetkevitch and Gertrude Chavez-Dreyfuss in New York, and Henning Gloystein in Singapore; Editing by Nick Zieminski)