GLOBAL MARKETS-Dollar jumps, stocks mixed as investors eye Fed rate hikes

·3 min read

* Nasdaq, S&P dip, Dow holds gains midday

* Dollar hits highest since July 2020

* Oil prices slip after hitting 7-year high

* Graphic: Global asset performance http://tmsnrt.rs/2yaDPgn

* Graphic: World FX rates http://tmsnrt.rs/2egbfVh

By Pete Schroeder

WASHINGTON, Jan 27 (Reuters) - U.S. stocks painted a mixed picture Thursday as investors digested how strong economic news could inform the Federal Reserve's thinking on interest rate hikes, while the dollar hit its highest level in over a year.

After a solid opening, stocks retreated around midday, with the tech-heavy Nasdaq Composite and S&P 500 dipping into negative territory, dropping 0.65% and 0.16%, respectively.

The Dow Jones Industrial Average was up 0.12%. The MSCI world equity index, which tracks shares in 45 countries, was down 0.48%

Markets opened optimistically due to new data out Thursday morning showing the U.S. economy accelerated in the fourth quarter, growing 6.9% -- the fastest rate since 1984. But gains were pared as investors processed how strong economic growth might inform the Fed's thinking, after Chair Jerome Powell indicated at a Wednesday news conference that the central bank's primary concern remained inflation.

"This is clearly good news for the health of the U.S. economy, while it strengthens the case for an aggressive tightening policy from the Federal Reserve," said David Madden, market analyst at Equiti Capital. "The fact that U.S. stocks are higher despite the solid GDP reading could be a sign that dealers are getting used to the idea there could easily be four or five rate hikes this year."

DOLLAR SURGES

The prospect of faster or larger U.S. interest rate hikes helped push the dollar to its highest levels since July 2020.

In its latest policy update on Wednesday, the Fed indicated it was likely to raise rates in March, as widely expected, and reaffirmed plans to end its pandemic-era bond purchases that month before launching a significant reduction in its asset holdings.

Fed funds futures showed traders pricing in as many as five rate increases by December, after previously fully pricing for four.

The dollar index, which measures the greenback's value against other major currencies, had climbed 0.8%, in the day, its biggest single-day gain in more than two months.

Expectations of Fed tightening sent the policy-sensitive U.S. two-year yield to an intraday high of 1.208%, a level last reached in February 2020. The two-year yield dipped slightly to 1.1683% in midday trading.

The benchmark 10-year yield slipped to 1.7869% after hitting a high of 1.88% on Wednesday.

Investors expect the speed at which the Fed tightens policy to be the major determinant of risk sentiment in the coming months, although the bank has said how quickly it hikes will depend on economic data and especially inflation.

"Our new base case for six hikes this year poses challenges to our bullish outlook for US equities. However, it is not sufficient to derail it on a standalone basis if earnings growth remains strong, in our view," BNP Paribas analysts wrote in a note.

Oil prices slipped slightly as the day progressed after hitting seven-year highs on the festering tension between Russia and Ukraine.

The United States said on Wednesday it had set out a diplomatic path to address sweeping Russian demands in eastern Europe, as Russia held security talks with Western countries and intensified its military buildup near Ukraine.

Brent crude was last down 0.59% at $89.43 a barrel. U.S. crude was down 0.7% at $86.74 per barrel.

Spot gold fell 1.36% to $1,793 an ounce, having hit $1,853 earlier in the week.

(Editing by Robert Birsel, Catherine Evans and Jonathan Oatis)

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