Dollar slides, stocks rise after dovish Fed statement

By Rodrigo Campos

NEW YORK (Reuters) - The S&P 500 closed at its highest in 2016, leading global stock gains, while the U.S. dollar weakened after the Federal Reserve held interest rates steady while lowering expectations for the number of rate hikes this year.

The Fed noted that the U.S. economy continues to face external risks, but indicated that moderate growth would allow it to resume tightening monetary policy this year.

Fresh projections, however, pointed to two quarter-point rate hikes by year's end, down from an expected four back in December.

The expectation for lower rates dragged the dollar down and hurt stocks in the financial sector. But major U.S. indexes rallied on the back of the Fed statement, with basic materials and energy sector stocks leading the way.

Commodity prices added to gains, boosted by a weaker greenback.

The CBOE volatility index <.VIX>, a gauge of what equity investors are willing to pay for protection against a drop in the S&P 500, closed at its lowest since early December.

"The Fed struck a very dovish tone, marking down its projected rate increase trajectory, while noting overall resilience in the U.S. economy and the absence of inflation pressures," said Brian Dolan, head market strategist at DriveWealth LLC in New Jersey.

"This should be encouraging for risk sentiment and risk assets."

The Dow Jones industrial average rose 74.23 points, or 0.43 percent, to 17,325.76 and the S&P 500 gained 11.29 points, or 0.56 percent, to 2,027.22, both ending at 2016 highs.

The Nasdaq Composite added 35.30 points, or 0.75 percent, to 4,763.97.

MSCI's gauge of equities in major world economies jumped 0.7 percent. Nikkei futures slipped 0.2 percent as the yen strengthened - a negative for Japanese companies heavily reliant on exports.

The U.S. dollar fell broadly, with the euro up 1 percent above $1.12 and the yen sharply reversing an earlier loss versus the greenback.

The dollar initially rose after data showed an increase in underlying U.S. inflation and the housing market continued to strengthen.

U.S. Treasury yields fell across the board after the Fed's statement and Chair Janet Yellen's press conference.

Benchmark yields turned negative after earlier hitting their highest in seven weeks. The 10-year note rose 6/32 in price to yield 1.9381 percent after briefly ticking above 2 percent for the first time since Jan. 28.

Oil prices jumped after OPEC sources said oil producers, including Gulf OPEC members, support holding talks next month on freezing output even if Iran won't take part. The weaker dollar further boosted crude and other commodities.

U.S. crude gained 6.1 percent to $38.54 a barrel, while Brent rose 4 percent to $40.27.

(Additional reporting by Gertrude Chavez Dreyfuss, Herbert Lash, Chuck Mikolajczak and Dion Rabouin; Editing by Meredith Mazzilli and Nick Zieminski)