Wall Street rallies as traders reassess Fed outlook; dollar slips

By Rodrigo Campos

NEW YORK (Reuters) - U.S. stocks led global shares higher on Monday after Federal Reserve policymakers sounded cautious notes on near-term interest rate increases, while the U.S. currency slipped.

Comments from Fed officials in the past few weeks had raised speculation of a U.S. rate increase this year and the European Central Bank and Bank of Japan recently refrained from further monetary policy easing, fuelling Friday's broad stocks selloff and rise in bond yields.

But U.S. stocks began to recover on Monday morning after Atlanta Federal Reserve Bank president Dennis Lockhart said economic conditions warrant a "serious discussion" of whether to raise rates at next week's Fed meeting, adding that there was no urgency to act.

"Lockhart helped assuage fears that a rate hike in September was imminent," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

Stocks hit session highs after Fed Governor Lael Brainard, who some had expected to abandon her stance and open the door to higher rates, said the U.S. central bank must be careful not to remove stimulus too quickly.

Brainard used the plural "months" to indicate how much more economic data she wants to monitor, a key suggestion according to Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

"This doesn’t mean November isn’t in play, but you’d be hard-pressed to still believe a September hike is in the offing," he said.

The probability markets assigned to a Fed rate hike at next week's meeting fell to 15 percent from 24 percent on Friday according to CME Group's FedWatch tool.

The Dow Jones industrial average (.DJI) rose 239.62 points, or 1.32 percent, to 18,325.07, the S&P 500 (.SPX) gained 31.23 points, or 1.47 percent, to 2,159.04 and the Nasdaq Composite (.IXIC) added 85.98 points, or 1.68 percent, to 5,211.89.

A gauge of equities across major markets (.MIWD00000PUS) turned positive on Brainard's remarks after falling 1 percent earlier in the session. It was last up 0.3 percent.

European stocks (.FTEU3) ended down 1 percent, cutting an earlier loss in half. Asian stocks finished lower, tracking Wall Street's large decline on Friday. Nikkei futures (.NKc1) were flat after having fallen more than 1.5 percent earlier.

YEN RISES, OIL UP

The U.S. dollar hit a session low against the euro and yen as Brainard's remarks further cut into expectations of a tightening move from the Fed, while speculation about a less-accommodative Bank of Japan boosted the yen.

The greenback was last down 0.8 percent against the yen at 101.83 yen and little changed against the euro at $1.1229.

"September is off the table," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York referring to chances of a hike at the Sept. 20-21 Fed meeting. “We continue to expect dollar weakness going forward until the end of the year."

The dollar index (.DXY) was last down 0.2 percent.

The benchmark U.S. Treasury yield was little changed after having risen to 1.697 percent, the highest since late June.

"The market right now is battling with the timing and how likely it is that they get a hike off this year," said Aaron Kohli, interest rate strategist at BMO Capital Markets in New York.

In commodities markets, crude oil prices ended higher, with traders citing a weaker U.S. dollar and stronger U.S. stocks.

Brent crude futures gained 0.2 percent at $48.12 a barrel, having recovered from a session low of $46.90, while U.S. crude rose from an intraday low of $44.72 to trade at $46.02, up 0.3 percent.

The biggest fall in U.S. crude oil inventories since 1999 last week, together with hopes for a deal between Saudi Arabia and Russia on stabilizing crude output at this month's OPEC meeting, have supported oil prices in the past week.

(Reporting by Rodrigo Campos; Additional reporting by Sam Forgione, Barani Krishnan and Karen Brettell; Editing by James Dalgleish and Meredith Mazzilli)