Global stocks gain after Fed, dollar index hits 14-month high

By Ryan Vlastelica

NEW YORK (Reuters) - Stock markets around the world closed with modest gains on Wednesday after the U.S. Federal Reserve renewed a pledge to keep interest rates near zero for some time, while bond yields rose and the dollar rallied on expectations of higher rates down the road.

The dollar hit a 14-month high and the benchmark U.S. 10-year Treasury note yield hit its highest level since July 7 after the Fed's projections suggested that some officials see rates rising more quickly than the U.S. central bank projected three months ago.

The hawkish interpretation in the bond and currency markets came even though the Fed's statement maintained language suggesting that alterations in policy would not happen for a "considerable time."

Government bonds that track inflation expectations sold off sharply, boosting yields, in another sign that markets were surprised by a more aggressive outlook for rate increases among some Fed policymakers for 2015 and 2016.

“The slightly new higher rate predictions suggest the Fed, once they start raising rates, will need to be more aggressive than previously thought," said Robert Stein, chief executive officer at Astor Investment Management in Chicago.

The S&P 500 came within a point of record levels before paring gains, while the Dow marked a record closing high.

The Dow Jones industrial average (.DJI) rose 25.2 points, or 0.15 percent, to 17,157.17, the S&P 500 (.SPX) gained 2.59 points, or 0.13 percent, to 2,001.57, and the Nasdaq Composite (.IXIC) added 9.43 points, or 0.21 percent, to 4,562.19.

The dollar index (.DXY) rose 0.6 percent to 84.60, moving to its highest level since July 2013. The euro fell 0.7 percent to $1.2868.

The benchmark 10-year U.S. Treasury note fell 8/32 in price to yield 2.6198 percent. The yield on the five-year Treasury inflation-protected security rose to 0.06 percent, its first move above zero in about a year in a sign of increased expectation for higher rates. The move was a reversal from earlier in the day, after weaker-than-expected U.S. consumer price data had damped expectations that the Fed would soon tilt toward tighter policy.

The most significant change by the Fed was the new rate projections, which suggested officials were positioning themselves for a potentially faster pace of rate hikes than envisioned when the last set of forecasts was released in June.

For the end of next year, the median projection for the federal funds rate was 1.375 percent, compared with 1.125 percent in June, while the end-2016 projection moved up to 2.875 percent from 2.50 percent. That's a fairly aggressive outlook for rates, as rates futures show the market does not see the Fed moving that quickly.

"The newly announced scheme for interest rate normalization shows that higher rates are in the cards, likely sooner than mid-2015," said John Kilduff, partner at Again Capital LLC in New York.

"The recent dollar strength and commodity weakness from that strength should continue, as a result."

In commodities trading, gold fell 1 percent while silver was down 1.3 percent. Both gold and silver sharply extended their declines in afternoon trading. Copper futures (CMCU3) rose 0.4 percent.

Brent crude futures (LCOc1) slipped 0.2 percent to $98.80 per barrel while U.S. crude futures (CLc1) lost 0.8 percent to $94.16 a barrel, declining after a jump of nearly 3 percent over the previous two sessions.

The MSCI International ACWI Price Index was unchanged while an index of top European shares (.FTEU3) ended up 0.4 percent despite continued uncertainty around Thursday's Scottish independence referendum, which most polls suggest is too close to predict.

(Additional reporting by Sam Forgione, Richard Leong, Robert Gibbons; Editing by Dan Grebler and Leslie Adler)