NEW YORK - Stocks surged while the dollar dropped as US inflation slowed more than expected, opening the way for the Federal Reserve to reduce the tempo of interest rate hikes.
US consumer prices rose at an annual pace of 7.1 percent in November, down from 7.7 percent in October, according to Labor Department data.
The consumer price index (CPI) is a closely-watched measure of inflation and was forecast by analysts to come in at 7.3 percent.
The bigger-than-expected drop should come as a relief to monetary policymakers after wholesale inflation proved hotter than expected last week.
"The key takeaway from the report at first blush is that overall inflation is cooling and that the Fed should be convinced to temper the pace of its rate hikes and perhaps place a lower ceiling on its terminal rate," said market analyst Patrick O'Hare at Briefing.com.
The central bank is widely expected to lift interest rates 50 basis points Wednesday -- a slowdown from the previous four 75-point hikes.
Lower inflation and interest rates are positive for businesses, and stock prices in Europe surged after the US inflation data was released.
While they later gave up part of those gains, London ended the day up 0.8 percent, Frankfurt 1.3 percent and Paris 1.4 percent.
Wall Street's main indices jumped more than two percent at the opening bell, but gave up some of those gains as the morning wore on.
The Dow stood up 0.7 percent in late morning trading.
"In summary, Santa has delivered a nice enough package to the Fed, who can now celebrate the Christmas with more peace knowing that inflation is moving in the direction that they want with plenty of tail wind behind," said Naeem Aslam, chief market analyst at Avatrade.
The prospect of the Fed slowing interest rate hikes was not positive for the US dollar, however, which lost more than one percent against its main rival currencies before cutting losses.
The weak dollar helped oil prices jump more than three percent, with Brent crude rising back above $80 per barrel.