* Fed outlook, U.S. bank test results boost sentiment
* European shares extend rally, led by banks
* U.S. dollar hits 11-month high against yen
By Luciana Lopez
NEW YORK, March 14 (Reuters) - The dollar edged higher on Wednesday, boosted by a cautiously brighter outlook from the Federal Reserve and news that most U.S. banks passed stress tests, while stocks were mixed after the previous session’s strong U.S. gains.
European stocks rose to near eight-month peaks and the dollar notched the latest in a series of 11-month highs against the yen.
The greenback also reached its strongest against the euro in a month, buoyed by speculation that the Fed could be inching away from adding more stimulus to the world’s biggest economy.
U.S. stock indices, however, followed the previous session’s sharp rise to multi-year highs with only slight gains.
The Fed said late on Tuesday it expects “moderate” growth over coming quarters, with the unemployment rate declining gradually, versus the “modest” growth the central bank said it expected in January.
Many analysts took the view that a further round of asset buying by the U.S. central bank is now less likely.
The Fed also said on Tuesday that most of the largest U.S. banks passed their annual stress test, in a report that underscored the recovery of the financial sector but called out a few laggards, including Citigroup Inc.
“The stress tests kind of marked the unofficial end of the 2008 financial crisis,” said Rick Meckler, president of investment firm LibertyView Capital Management in New York.
“There is a lot of news in the market in the last couple of days of a global nature,” Meckler said, referring to the Greek debt crisis and the Fed’s policy statement.
“Given the fact the market has rallied so far, you have investors coming in today and trying to consider what the next phase for the market will be,” he added.
Hints of a brighter outlook crept across the Atlantic as a slight rise in euro zone industrial production data for January ended two consecutive monthly falls and pointed toward the bloc’s eventual recovery.
But the impact of high oil prices kept optimism in check, weighing on growth prospects and dampening hopes that Europe’s debt crisis might be easing.
In contrast, economists in a Reuters poll said the U.S. economy will gain traction this year after a sluggish first quarter, even as the potential threat from higher oil prices pushes analysts to raise their inflation expectations.
The Fed’s latest statement, which made no direct mention of policy easing, was in line with recent stances adopted by the European Central Bank and the Bank of Japan to wait and see the impact of measures already taken.
“Major central banks, including the Fed, ECB and the BoJ, have stepped off the gas pedal and we’ll likely need another deterioration in economic data before additional liquidity is provided,” analysts at Morgan Stanley said in a note.
The Dow Jones industrial average was up 15.85 points, or 0.12 percent, at 13,193.53. The Standard & Poor’s 500 Index was down 0.93 points, or 0.07 percent, at 1,395.02. The Nasdaq Composite Index was up 6.03 points, or 0.20 percent, at 3,045.91.
The FTSEurofirst 300 pan-European index of top European shares was 0.43 percent higher at 1,100.06 and hit its highest intraday level since July 26, while the MSCI world equity index slipped 0.12 percent.
The dollar rose 0.99 percent to 83.68 yen. The euro weakened 0.31 percent to $1.3041, touching its lowest since Feb. 16.
“It may prove a temporary phase, but at present the U.S. dollar is benefiting from higher relative yields reflecting the outperformance of the U.S. economy over other major developed economies,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
The upsurge in risk appetite crimped demand for safe-haven government debt. The benchmark 10-year U.S. Treasury note was down 30/32, the yield at 2.2311 percent.
Brent and U.S. crude futures turned higher after a government report from the Energy Information Administration showed U.S. crude stocks rose last week in line with expectations, but by a smaller amount than previously reported by the industry, with refined products stocks lower.
Brent crude rose 0.15 percent to $126.41 a barrel. U.S. crude gained 0.07 percent to $106.78 per barrel.