Stocks see biggest gains since January, dollar rises after U.S. data

By Dion Rabouin

NEW YORK (Reuters) - U.S. stocks led equity markets around the globe to their highest in nearly two months on Tuesday after U.S. factory and housing data came in better than expected and oil prices rose.

Construction spending in the U.S. rose to the highest level since October 2007 and a measure of the U.S. manufacturing sector outpaced analysts' expectations across the board.

The data gave investors a greater sense of confidence and a bigger risk appetite, said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

"The stimulus to better stock price action is signs that the U.S. economy is, in fact, doing better," James said.

U.S. stock markets rose 2 percent in afternoon U.S. trading with the S&P 500 posting its largest percentage gain since early January. [.N]

The Dow Jones industrial average rose 323.17 points, or 1.96 percent, to 16,839.67, the S&P 500 gained 39.69 points, or 2.05 percent, to 1,971.92 and the Nasdaq Composite added 111.72 points, or 2.45 percent, to 4,669.67.

A global gauge of equity markets rose more than 1.6 percent, touching its highest level since Jan. 13.

European shares extended their strongest run of the year, underpinned by the prospect of the European Central Bank adding stimulus in the euro zone after soft factory data. The FTSEurofirst 300 gained nearly 1.5 percent. London's FTSE 100 <.FTSE> rose 0.9 percent.

Stocks looked to continue a yearlong correlation with oil as crude prices reversed an early negative turn and moved toward a two-month high.

Brent , the global benchmark for crude oil, was up 0.6 percent $36.80 a barrel, after touching a session low at $35.95. U.S. crude was up 1.9 percent to $34.39 a barrel, after an intraday low of $33.37.

Crude oil prices have risen in seven of the past 12 sessions.

The strong U.S. data also strengthened the dollar , which rose against a basket of major currencies to a one-month high of 98.57.

The dollar rose more than 1 percent against the yen , rebounding after its worst month against the Japanese currency since 2008.

The yen also suffered from Japan becoming the first G7 economy to sell a 10-year government bond at a negative yield, meaning that investors are effectively paying rather than getting paid to hold the country's bonds.

The euro fell to a one-month low against the dollar and touched its lowest in almost three years against the yen .

The benchmark 10-year Treasury note was last down 26/32 in price to yield 1.83 percent, up from 1.74 percent late on Monday.

The U.S. manufacturing data also prompted investors to strengthen their outlook on a possible U.S. interest rate increase by year-end.

Fed funds futures on Tuesday implied traders see a 56 percent chance of the U.S. central bank raising rates at its December policy meeting , higher than the 30 percent chance on Monday and more than four times greater than the 12 percent chance seen a month earlier, according CME Group's FedWatch program.

But traders still see only a 4 percent chance of the Fed raising interest rates at its next meeting on March 16.

(Reporting by Dion Rabouin; Additional reporting by Karolin Schaps, Abhiram Nandakumar; Editing by Chris Reese and Chizu Nomiyama)