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Global Markets: Shares, dollar climb as Fed lays out new inflation strategy

NEW YORK (Reuters) - A gauge of world equity markets and the dollar rose on Thursday after the Federal Reserve said it would roll out an aggressive new strategy that aims to boost employment and allow inflation to run a bit faster for longer than in the past.

FILE PHOTO: An electronic board shows currency exchange rates, in Buenos Aires' financial district, Argentina August 16, 2018. Picture taken with long time exposure. REUTERS/Agustin Marcarian/File Photo

Yields also gained on longer-dated government bonds as Fed Chair Jerome Powell laid out a policy that will seek to achieve inflation averaging 2% over time and offset below -2% periods with higher inflation “for some time.”

The Fed also aims to ensure employment doesn’t fall short of its maximum level, a new approach Powell said reflected an appreciation “that a robust job market can be sustained without causing an unwelcome increase in inflation.”

The dollar rebounded after initially falling and gold prices also flipped, retreating from early gains in reaction to comments from Powell that investors had widely expected.

“Ultimately, this just means interest rates are going to stay very, very low for even longer than we expected,” said Esty Dwek, head of global market strategy at Natixis Investment Managers in Geneva.

“It’s lower for even longer and the market was pretty much anticipating this,” Dwek said.

The dollar index rose 0.138%, spot gold prices fell 1.37% to $1,926.66 an ounce while advancing shares outnumbered declining stocks on Wall Street as the S&P 500, the Nasdaq and MSCI’s global equity benchmark all set new highs.

MSCI’s benchmark for global equity markets rose 0.18% to 585.08, but Europe’s broad FTSEurofirst 300 index closed down 0.57% at 1,438.26.

On Wall Street, the Dow Jones Industrial Average rose 0.92%, the S&P 500 gained 0.55% and the Nasdaq Composite added 0.38%.

“The market will probably take some time to digest the implications,” said Nancy Davis, chief investment officer at Quadratic Capital Management LLC in Greenwich, Connecticut.

“But I believe that a higher willingness to let inflation run above 2% should hurt long-end bonds and inflation expectations probably should increase,” she said.

Powell’s remarks on achieving full employment, one of the Fed’s dual mandates, came as new data suggested the labor market recovery was stalling as the COVID-19 pandemic drags on and financial aid from the government dries up.

The number of Americans filing new claims for unemployment benefits hovered around 1 million last week, while the U.S. economy suffered its sharpest contraction in at least 73 years in the second quarter, two government entities said.

While the 10-year U.S. Treasury note rose 4.7 basis points to 0.7341%, it remained within a range it has mostly held since March, when the Fed flooded the market with liquidity to drive down market rates.

Safe-haven 10-year German bund yields rose to their highest since early July at -0.384%.

The euro was last down 0.08% at $1.1820.

Spot gold prices fell 1.37% to $1,926.66 an ounce.

Oil prices fell as a massive hurricane in the Gulf of Mexico made landfall in the heart of the U.S. oil industry, forcing oil rigs and refineries to shut down.

Brent crude futures fell $0.42 to $45.22 a barrel. U.S. crude futures slid $0.28 to $43.11 a barrel.

Reporting by Herbert Lash; Editing by Bernadette Baum