By Caroline Valetkevitch
NEW YORK (Reuters) - World stock indexes advanced and the Nasdaq hit a record high on Thursday while bonds rallied, a day after the U.S. Federal Reserve signalled an increasingly cautious approach to future U.S. interest rate increases.
The dollar fell to its lowest in a week against a basket of major currencies as investors sold the greenback following the Fed's reduction of longer-term interest rate expectations.
The Fed said it could hike rates by year-end as the labour market improved further, but scaled back the number of rate increases expected in 2017 and 2018. It also reduced its longer-run rate forecast to 2.9 percent from 3 percent.
That left investors feeling that any monetary policy tightening would be leisurely at best. Market pricing for a December move rose only a fraction to 59.3 percent from 59.2 percent, according to CME Group's FedWatch tool.
"The Fed probably appeared less hawkish than what the markets had expected," said Ryan Larson, head of equity trading at RBC Global Asset Management in Chicago. "I think the market continues to be focused on the Fed pushing a hike for later as a good thing rather than bad."
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The Dow Jones industrial average was up 125.33 points, or 0.69 percent, to 18,419.03, the S&P 500 gained 15.04 points, or 0.7 percent, to 2,178.16 and the Nasdaq Composite added 44.34 points, or 0.84 percent, to 5,339.52.
MSCI's all-country world stock index was up 1.1 percent, while Europe's STOXX 600 <.STOXX> closed up 1.6 percent.
In the bond market, benchmark U.S. yields hit near two-week lows on revived bets the Fed would raise rates slowly due to weak economic growth and inflation stuck below its 2-percent goal.
Benchmark 10-year Treasury notes rose 12/32 in price for a yield of 1.627 percent, down 4 basis points from Wednesday.
The dollar index dropped 0.3 percent to 95.380.
Oil prices climbed for a second day on U.S. government data that showed a surprising crude inventory drop, but the advance was limited by trader worries that OPEC was not nearing an agreement to reduce a global glut.
U.S. crude was up $1, or 2.2 percent, at $46.34 a barrel, while Brent crude futures rose 65 cents, or 1.4 percent, to $47.48.
In other commodities, gold hit a two-week high, with spot gold last up 0.2 percent at $1,339.46 an ounce.
(Additional reporting by Yashaswini Swamynathan in Bengaluru and Marc Jones in London; Editing by Nick Zieminski and Bernadette Baum)