LONDON (Reuters) - Shares and bonds rallied globally on Thursday and the dollar tumbled after U.S. central bank chief Ben Bernanke signaled the Fed may not be as close to winding down its stimulus policy as markets had begun to expect.
Wall Street was expected to open sharply higher and could set a new all-time high if the S&P 500 .SPX gains 1.4 percent to break through May's record. .N
Fed Chairman Bernanke said on Wednesday the overall message coming from the central bank was that "a highly accommodative policy is needed for the foreseeable future.
Despite minutes from the Fed's June meeting showing half of its policymakers think its $85 billion-a-month stimulus program should be wound down by the end of the year, Bernanke's message was enough to snap markets back into buying mode.
U.S. stimulus has supported equity markets and kept interest rates low and there is concern in financial markets that if the Fed unwinds its support too soon that could slow the recovery of the world's biggest economy.
Benchmark European bonds tracked gains in U.S. debt and European shares .FTEU3 climbed almost 1 percent to push MSCI's world index .MIWO00000PUS to its highest in just under a month. Commodities and emerging market assets also rose as did the oil price.
"Bernanke's comments were taken by the markets as much more dovish so I suspect it will be a good day for risk markets," said Saxo bank Chairman and senior market analyst Nick Beecroft.
"We are still in a bit of a sweet spot. The economy is doing well enough to encourage equity markets about future earnings, but not too hot to cause the Fed to remove accommodation."
The dollar .DXY, which had touched three-year highs before the Fed remarks on Wednesday, tumbled 1.3 percent against a basket of major currencies, while the euro roared to a three-week high of $1.32085 before a short, sharp check left it at $1.3061.
Large swings in currencies, stocks and bonds over the last few weeks have highlighted the tricky task the Fed and other central banks face as they try and wean markets off the cheap and easy money they have provided during the global financial crisis.
"Communication is a real challenge for the Fed, so brace for further whipsaws on Bernanke's semi-annual testimony (next week)," said Sean Callow, a currency strategist at Westpac.
Portuguese, Spanish and Italian bonds and Lisbon's stock market .PSI20 bucked the wider global move higher in markets, however, as tensions continued to bubble on the euro zone's debt-strained southern fringe.
With Portugal's coalition government teetering, President Anibal Cavaco Silva urged a cross-party deal with the main opposition socialists to try and ensure the country keeps to its bailout deal.
Italy was also in the spotlight, and by proxy Spain, after Rome failed to hit the top of its pre-flagged target at a 3- and 30- year bond sale. It followed this week's rating downgrade and ongoing political difficulties.
"There is political risk coming back into the periphery," said ING strategist Alessandro Giansanti.
"We saw the Italian downgrade and the current government is not very active in terms of reforms ... And there is the situation in Portugal where we will probably see a government that will be less open to applying in total the plans (of the bailout deal).
Relief over the Fed's stance was clearly evident in emerging markets, which have benefited from the cheap money and have been hard hit recently by the prospect of a change in tack in global monetary policy.
Emerging equities and currencies from Asia to eastern Europe rose, including the recently battered Turkish lira, though it underperformed as the threat of capital flight continued to hang over Turkish markets.
Commodity markets gained on the view that continuing stimulus from the Fed, and European and Japanese central banks, would support global economic growth.
Copper prices jumped 3 percent to exceed $7,000 a metric ton, hitting a three-week high. Gold climbed 2.7 percent to a three-week high and was on track for a fourth straight day of gains, while U.S. crude oil prices added 0.7 percent to their highest level since March 2012.
Commodity-related currencies jumped too. The Australian dollar climbed as high as $0.9306, further off a 34-month trough of $0.9036 plumbed just last week. It was helped by a surprise increase in Australian employment in June, which may reduce the likelihood of a near-term cut in interest rates.
But as the yen strengthened, Tokyo's Nikkei share average .N225 underperformed other Asian markets, up 0.4 percent.
The Bank of Japan kept monetary policy steady at its latest meeting but said an economic recovery was underway, its most optimistic view in 2-1/2 years reflecting the positive impact of a weakening yen and its massive stimulus plan.
Editing by Susan Fenton