Wall Street rallies, dollar gains after Fed policy statement

By Michael Connor

NEW YORK (Reuters) - U.S. stock averages posted their best day this year and the dollar strengthened on Wednesday after the Federal Reserve signaled America's economy was strong enough to handle interest rate hikes in 2015, though it emphasized that shifts in policy would be gradual.

The dollar rose against most other currencies, but declined sharply against the Russian rouble, whose dramatic drop in recent weeks has caused a national economic crisis.

Wall Street rebounded after three days of declines, adding to gains after the Fed, in its statement after its last policy meeting of the year, said it was adopting a "patient" approach to raising interest rates. The Fed said that investors should view its latest outlook as similar to its frequent use of the phrase "considerable time" before raising rates.

Markets took the comment as a sign the U.S. central bank will end historically low rates next year. Fed Chair Janet Yellen, in a press conference following the statement, said the Fed could act at any time, but suggested monetary policy would be accommodative for a long period of time.

"The Fed is in the best of all possible worlds because they appreciate the need to restore monetary policy to more normal levels, that they have the luxury of time because there’s no inflationary pressure," said Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking in New York.

In the latest economic data released on Wednesday, U.S. consumer prices recorded their biggest drop in nearly six years in November as gasoline prices tumbled.

"Today's CPI report is a reminder on how low inflation has fallen," said Mike Lorizio, head of Treasuries trading at John Hancock Asset Management in Boston.

The Dow Jones industrial average ended up 1.69 percent at 17,356.87, while the S&P 500 gained 2.04 percent to 2,012.89, and the Nasdaq Composite added 2.12 percent.

The MSCI world equity index, which tracks shares in 45 nations, rose 0.85 percent.

U.S. Treasuries yields rose, as some traders positioned holdings for a possible increase in U.S. short-term interest rates in 2015.

The benchmark 10-year Treasuries yield was 2.115 percent, up 4 basis points from late on Tuesday, while the 30-year bond yield was last at 2.742 percent, up 4 basis points from Tuesday's close.

In currency markets, the dollar index, which tracks the greenback against six major currencies, was last up 1 percent as investors bet on a Fed rate hike in 2015.

But the dollar pulled back from recent gains against the rouble, which has been hammered due to worries about increased U.S. sanctions and the effect of lower oil prices on Russia's struggling economy. The dollar of late bought 60.25 roubles, down more than 12 percent on the day.

Oil prices moved above $62 a barrel as U.S. data showed falling crude inventories, stemming deep losses brought on by a supply glut and signals from OPEC producers and Russia that they will not cut production. Prices later eased, with Brent crude last up 67 cents at $60.69 a barrel.

The global economy is ending the year in a fragile state, with weak growth in Europe and Japan and slowing demand in China.

(Reporting by Michael Connor in New York; Editing by Leslie Adler)