Stocks and bonds roar Fed approval, dollar fights back

LONDON (Reuters) - World shares rose back towards all-time highs and a slump then a jump in the dollar triggered wild moves in currency markets on Thursday, as investors priced in a later start and a slower pace for future U.S. rate rises.

European shares climbed 0.5 percent <.FTEU3> as London's FTSE <.FTSE> hit a new record peak and Wall Street was expected to consolidate its sharp gains of the previous day when it reopens in New York.

Asia also enjoyed its best day in 18 months, while bond markets saw government yields hit new all-time lows from Australia to Germany as investors piled back in, betting that the era of easy money is not about to end just yet.

Sweden confirmed that belief by unexpectedly cutting rates again this week.

The shift in U.S. rate expectations hit the dollar <.DXY> hard at first, but a valiant fightback in Asia and then in Europe repaired almost all of the damage.

The euro found itself as high as $1.10625 in turbulent trade late on Wednesday, but was back down at $1.0680 as markets calmed and focus began to turn to what are expected to be difficult euro zone talks on Greece later.

Short-term U.S. yields nudged back higher, having boasted their biggest drop in six years after the Federal Reserve trimmed its inflation and growth forecasts and said unemployment could fall further than first thought without risking a spike in inflation.

The median projection for the Fed funds rate at the end of 2015 was cut to 0.625 percent, down half a point from December.

Fed Chair Janet Yellen also sounded uncomfortable with the strength of the dollar, saying it would be a "notable drag" on exports and a downward force on inflation.

"They (Fed) are still on course to raise rates, but they will do that at a more gradual pace over the years ahead," said Lee Hardman, an FX strategist at Bank of Tokyo Mitsubishi.

"A lot of people were looking for more attractive levels to buy the dollar after the recent strong moves, and the meeting provided that, so the rebound now makes perfect sense."

The market reaction to Yellen's comments was immediate and dramatic. Fed fund futures <0#FF:> surged as investors sharply scaled back expectations for how fast and far rates might rise.

The December contract rocketed to 99.59, implying a rate of 41 basis points and reversing the impact of the last two payrolls reports.

Yields on two-year notes had peeled off a huge 12 basis points to 0.55 percent but then were pushed back up to 0.59 by some reassuring jobs data ahead of U.S. trading.

DOLLAR FIGHTBACK

European markets were given another reason for optimism as banks took more than twice the expected amount of long-term loans from the European Central Bank, loading up on the cheap credit in a fresh sign that a nascent euro zone recovery is spurring lending.

James Knightley, an economist with ING, said the strong take-up suggested there was "a growing appetite to lend. People are also willing to buy, and willing to buy on credit."

The main dollar basket <.DXY>, which measures it against six of the world's top currencies, was back above 99 by 1230 GMT. That was almost back to where it was before the Fed comments and came as the euro , the yen , sterling all gave back ground. [FRX/]

The Swiss franc strengthened slightly after the SNB decided against moving interest rates deeper into negative territory, although after the Fed's move there was little doubt that the big central banks are now locking horns in a currency war.

Emerging market assets were also cheered by the Fed's soothing message. Most Asian emerging currencies jumped, with China's yuan hitting a two-month high and MSCI's main EM stock index up 1.3 percent <.MSCIEF> at a three week high. [EMRG/FRX]

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> climbed 1.6 percent, its largest daily gain since September 2013. Australia's main index <.AXJO> jumped 1.9 percent led by banks as markets wagered on lower domestic rates.

The only laggard was the Nikkei <.N225> which slipped 0.2 percent in reaction to a firmer yen.

Among commodities, gold sagged to $1,164 an ounce having climbed from $1,145 on Wednesday and copper bounced sharply off a one-month low.

U.S. crude meanwhile was off $1.76 at $42.88, though that followed a gain of 3 percent on Wednesday. Brent was $1.22 easier at $54.70 a barrel. [O/R]

(Additional reporting by Wayne Cole in Sydney; Editing by Gareth Jones)