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GLOBAL MARKETS-Stocks rally as euro leaps on likely rate hikes

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·4 min read
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* Wall Street rallies as European bourses also gain

* German IFO business index shows unexpected resilience

* ECB says could see interest rate "lift-off" in July

* Dollar weakens as euro gains on ECB rate talk

By Herbert Lash and Marc Jones

NEW YORK/LONDON, May 23 (Reuters) - U.S. and European stocks mostly rallied on Monday, with the S&P 500 trading just above bear market territory, while the euro jumped after the European Central Bank said it was likely to lift its deposit rate out of negative territory by September.

Oil prices slid and gold extended recent gains, but the dollar fell further as investors cut their bets on more advances in the greenback based on market expectations of yields moving higher still from Federal Reserve monetary tightening.

The MSCI all country world index gained 1.14%, though it was still down about 17% from its record high in January, and the pan-European STOXX 600 index was up 0.99%.

Stocks on Wall Street also gained, though the Nasdaq lagged after it briefly traded in the red.

The Dow Jones Industrial Average rose 1.65%, the S&P 500 gained 1.33% and the Nasdaq Composite added 0.76% in choppy trade.

Value stocks rose 1.49%, or more than the 1.15% gain in growth stocks.

Stock investors are under the illusion that the Fed will rescue the market from further decline by easing monetary policy, or what has become known as the Fed "put," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities.

"It's going to be a very, very sluggish growth environment and the Fed's not going stand in the way of it," Ricchiuto said.

"You're seeing the bond market go down in yield. That's been saying to the equity market that the put isn't there and therefore the equity market needs to adjust as well."

The yield on 10-year Treasury notes was up 5 basis points at 2.837%, but almost 40 basis points lower than a multi-year high of 3.203% set two weeks ago.

The focus in Europe was on ECB President Christine Lagarde, who accelerated an already sharp policy turnaround from all but ruling out rate hikes to now pencilling in several in the face of record-high euro zone inflation.

The prospect of higher rates sent the euro up as much as 1.1% to $1.0687. The single currency has risen 3.3% since hitting a multi-year low on May 13.

"The doves are throwing in the towel," said Holger Schmieding of Berenberg bank, adding that he expects ECB rate hikes of 25 basis points in July, September and December.

A survey from the Ifo institute on Monday showed that German business morale unexpectedly rose in May, helping to calm investors for now, at least.

"I don't think we have reached rock bottom yet, it's a bear market rally. The market is still pretty concerned about sticky inflation," said Michael Hewson, chief markets analyst at CMC Markets.

The World Economic Forum holds its first in-person meeting in two years in Davos, Switzerland over the coming four days, with central bankers and the International Monetary Fund participating in panels on the outlook for economies and inflation.

PEAK DOLLAR?

The dollar index, which tracks the greenback against a basket of other major currencies, was down 0.729%. The index rose by about 16% to a two-decade high over the 12 months to mid-May.

"The dollar may be carving out a peak, given Europe's resilience to the energy shock and potential easing of lockdowns in China," said Commonwealth Bank of Australia strategist Joe Capurso.

Asian stocks fell as investors worried inflation and rising interest rates would hamper the global economy's performance.

MSCI's broadest index of Asia-Pacific shares outside Japan was slightly weaker.

U.S. crude fell 0.91% to $109.28 per barrel and Brent was at $112.02, down 0.47% on the day.

Spot gold added 0.5% to $1,854.00 an ounce.

(Reporting by Herbert Lash, additional reporting by Huw Jones in London; Editing by Emelia Sithole-Matarise, Kirsten Donovan)