(Recasts with U.S. markets, changes byline and dateline;
previous LONDON)
* U.S., European stocks rally after tame U.S. CPI reading
* Dollar poised for biggest weekly gain in three years
* Oil retreats, U.S. bonds rise on muted rate outlook
By Herbert Lash
NEW YORK, June 13 (Reuters) - U.S. and European stocks
rallied and the dollar headed to its biggest weekly gain in
three years on Friday after retreating oil prices and a benign
reading of core U.S. consumer prices eased inflation fears.
U.S. and European government debt prices rose after the CPI
data alleviated concerns that inflation pressures could soon
force the Federal Reserve to hike interest rates. Excluding
food and energy, core CPI was unchanged in May at an annual 2.3
percent rate.
Oil prices dropped $3 to near $134 a barrel on a report
that Saudi Arabia was considering a sizable increase in crude
output to cool prices hovering near record highs.
Investors snapped up a broad range of stocks, including
beaten-down financial shares, on the view steady interest rates
would help nurture an economic recovery in the United States
and improve the outlook for corporate profits.
Microsoft Corp <MSFT.O> was the biggest contributor to the
tech-rich Nasdaq and the broad Standard & Poor's 500 Index,
advancing more than 3.4 percent to $29.20 after a . Goldman
Sachs led financials on the S&P, rising 4.7 percent to
$174.57.
Crude prices in New York fell 1 percent to $135.37 a
barrel.
"There's just been such a build-up in oil prices and
hawkish talk from the Fed that when that number printed today
-- and it was in-line on the core -- it really took the heat
off the interest rate markets and the Fed," said Jim Paulsen,
chief investment officer at Wells Capital Management in
Minneapolis.
Before 1 p.m., the Dow Jones industrial average <> was
up 86.22 points, or 0.71 percent, at 12,227.80. The Standard &
Poor's 500 Index <.SPX> was up 10.55 points, or 0.79 percent,
at 1,350.42. The Nasdaq Composite Index <> was up 33.10
points, or 1.38 percent, at 2,437.45.
European stocks, led by the financial sector, tracked Wall
Street's rally as declining oil prices and U.S. CPI data eased
inflation concerns.
Among top percentage gainers in the financial sector, HBOS
<HBOS.L> soared 13.7 percent while Swiss lender UBS <UBSN.VX>
jumped 5.2 percent.
Commerzbank <CBKG.DE> added 5.9 percent and Dresdner Bank
<ALVG.DE> rose 4.1 percent after a source from Commerzbank's
supervisory board said the two banks are in advanced merger
talks.
The FTSEurofirst 300 <> index of top European shares
rose 0.5 percent at 1,267.36 points, reversing early losses
that had pushed the index to a low of 1,247.54 points. It was
the second day of advances after a six-day losing streak.
"At one stage earlier in the week it really did feel that
the market was out of control," said Mike Lenhoff, chief
strategist at Brewin Dolphin. "We could see a decent rebound
looking into next week."
The dollar rose as soaring gasoline and energy prices drove
up non-core U.S. consumer prices in May at the fastest rate
since November and raised currency market expectations of
higher U.S. interest rates.
The markets in New York reacted with confusion at first as
the headline figure showed a large 0.6 percent gain. But
investors then looked at the Commerce Department's report that
were up just 0.2 percent.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.28 percent at 74.021. Against the yen,
the dollar <JPY=> was unchanged at 107.93.
The euro <EUR=> was off 0.41 percent at $1.5382.
The euro has lost about five cents against the dollar since
Monday as European Central Bank policy-makers dampened
expectations of an emminent rate hike.
The euro was also pressured by Irish votes rejecting the
European Union's Lisbon treaty, putting plans to overhaul the
bloc's institutions in peril.
U.S. Treasury debt prices were mixed. The benchmark 10-year
U.S. Treasury note <US10YT=RR> rose 4/32 to yield 4.20 percent.
The 30-year U.S. Treasury bond <US30YT=RR> fell 6/32 to yield
4.77 percent.
U.S. short term interest rate futures pruned back the
implied chance of a 25 basis point rate increase at the U.S.
central bank's June policy meeting to about 14 percent after
the inflation and sentiment reports, from about 30 percent
earlier Friday.
Asian stocks inched up, with Japan's Nikkei share average
<> closed 0.6 percent higher but posted its largest weekly
drop in three months.
The MSCI index of Asian equities <.MIAS00000PUS> was down
6.2 percent this week, the largest decline since the week of
Aug. 19.
(Reporting by Ellis Mnyandu, John Parry and Nick Olivari in
New York and Ian Chua, Santosh Menon, Jan Harvey and Rebekah
Curtis in London
(Reporting by Herbert Lash. Editing by Richard Satran)
