* U.S. stocks surge after surprise Fed move to buy debt
* Government debt yields plunge in biggest drop since 1987
* Euro jumps to above $1.34, dollar slumps to 2-month low
* Oil falls as U.S. crude stocks increase double forecasts
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, March 18 (Reuters) - U.S. stocks surged on
Wednesday after the Federal Reserve moved to revive the ailing
U.S. economy through a $300 billion program to buy U.S.
government debt, knocking bond yields down in their biggest
one-day slide since the Wall Street crash of 1987.
The U.S. dollar plunged to a two-month low against the euro
and gold rebounded sharply on its appeal as a hedge against
inflation after the Fed's surprise move -- the first time it
has bought longer-term Treasuries since the early 1960s.
Shares of financial companies and home builders shot higher
as investors bet that the plan, announced at the end of a
two-day meeting of policy-makers, would ease borrowing costs.
The KBW Bank index <.BKX> jumped 11.1 percent, the S&P
Financial index <.GSPF> gained 10.1 percent and the Dow Jones
home construction index <.DJUSHB> climbed 8.3 percent.
Two of the biggest banks that have been heavily battered
during a financial crisis spawned by a slumping housing market
in mid-2007 also surged.
Citigroup <C.N> soared almost 23 percent to more than $3 a
share and Bank of America <BAC.N> rose more than 22 percent.
The euro surged above $1.34 for the first time since
mid-January as analysts feared the Fed's move would flood the
market with dollars and increase already large U.S. deficits.
"It is positive for basically every asset class except the
dollar which will probably suffer on the back of the theme of
printing money," said Carl Lantz, U.S. interest rate strategist
at Credit Suisse in New York.
Dan Fuss, a vice chairman at Loomis Sayles in Boston, said
interest rates will fall because the move affects mortgage
rates and everything else tied to the U.S. Treasury market.
"This is positive short-term but bad longer-term: As the
Fed increases its balance sheet, where are they going to get
the money? The yen is strengthening against the dollar and that
is bad news for Japan," said Fuss.
The Dow Jones industrial average <> closed up 90.88
points, or 1.23 percent, at 7,486.58. The Standard & Poor's 500
Index <.SPX> climbed 16.23 points, or 2.09 percent, at 794.35.
The Nasdaq Composite Index <> gained 29.11 points, or 1.99
percent, at 1,491.22.
The benchmark S&P 500 at one point during the session rose
above the 800 mark, a key technical barrier, for the first time
in a month.
The Fed also said it would buy up to $1.2 trillion of
mortgage-backed securities, up from a prior plan to buy $500
billion of those securities by June, or nearly all a year's
issuance.
"If this doesn't cut mortgage rates to 4.5 percent and jump
start the housing market, what will?" said Chris Rupkey, chief
financial economist at Bank of Tokyo/Mitsubishi UFJ in New
York.
Government bonds rose sharply. Benchmark 10-year Treasury
notes <US10YT=RR>, which were up 20/32 in price before the Fed
announcement, shot up more than four points to 136/32. Yields
tumbled to 2.52 percent from 2.95 percent before the news.
The 30-year U.S. Treasury bond <US30YT=RR> rose 173/32 in
price to yield 3.52 percent.
The euro's surge was the biggest one-day gain since its
1999 inception.
The dollar fell against a basket of major currencies, with
the U.S. Dollar Index <.DXY> down 2.96 percent at 84.233.
Against the yen, the dollar <JPY=> fell 2.47 percent at 96.16.
Oil fell $1 a barrel after data showed U.S. crude
inventories swelled to their highest level in nearly two years
and the World Bank cut its 2009 forecast for Chinese economic
growth.
The U.S. Energy Information Administration said crude oil
stocks rose 2.0 million barrels to 353.3 million last week --
double the increase forecast by analysts. []
Gasoline supplies jumped by 3.2 million barrels, countering
forecasts of a 1.2 million-barrel drop.
"The numbers look bearish. It's the build in gasoline that
was most dramatically bearish since the market was looking for
a decline," said Tim Evans, analyst at Citi Futures Perspective
in New York.
U.S. light crude <CLc1> fell $1.02 to settle at $48.14 a
barrel. London Brent crude <LCOc1> tumbled 58 cents to settle
at $47.66 a barrel.
U.S. gold futures for April delivery <GCJ9> had settled
down 3 percent at $889.10 an ounce before the Fed's move.
Spot gold <XAU=> rose 1.7 percent at $930.00 an ounce.
Earlier in Europe, the FTSEurofirst 300 <> index of
top European shares closed 0.7 percent lower at 710.90 points.
(Reporting Chuck Mikolajczak, Ellis Mnyandu, Vivianne
Rodrigues, Chris Reese in New York and Christopher Johnson, Jan
Harvey in London; writing by Herbert Lash)
