Hopes of a Fed rate cut boost stocks

Stocks rallied sharply Tuesday, bolstered by confidence that the Federal Reserve will cut interest rates next week and some upbeat corporate news.

Energy shares also helped to pace the market’s advance as crude oil prices hit record highs.

In other trading, the dollar slumped against the euro, the British pound and other key currencies. Gold, viewed as an alternative to the weak dollar, zoomed to its highest in 16 months.

The Dow Jones industrial average gained 180.54 points, or 1.4%, to 13,308.39, its biggest rise in two weeks.

The Standard & Poor’s 500 jumped 19.79 points, or 1.4%, to 1,471.49. The Nasdaq composite rose 38.36 points, or 1.5%, to 2,597.47.

The Russell 2,000 small-stock index was up 1.6%.

Winners topped losers by nearly 3 to 1 on the New York Stock Exchange and by 2 to 1 on Nasdaq.

Fed Chairman Ben S. Bernanke, in a speech in Berlin, said nothing to change hopes for an interest rate cut at the Fed’s policy meeting on Sept. 18. He stuck to the scheduled topic of global trade imbalances.

“Bernanke didn’t really say anything about interest rates, but at this point the feeling on Wall Street is that it’s mandatory,” said Steven Goldman, market strategist at Weeden & Co., speaking about a rate cut.

Financial markets worldwide have been in turmoil since mid-July, as the downturn in the U.S. housing and mortgage markets has led investors to pull back from risk-taking.

On Friday, the government’s report that the nation lost a net 4,000 jobs in August deepened concerns that the economy could slide into recession if the Fed doesn’t ease credit.

The Dow slumped nearly 250 points Friday.

On Tuesday, some encouraging corporate news also helped underpin confidence about the economy.

Lake Forest-based Western Digital, the No. 2 disk-drive maker, lifted its earnings and revenue forecast late Monday on improved demand. The company’s shares rose 99 cents to $23.40.

General Motors jumped $1.33 to $30.54 after the company said it needed fewer incentives to lure buyers to its newest models.

McDonald’s gained $1.61 to $51.76 after the company said August sales at U.S. stores open more than one year rose 7.4%, beating some analysts’ expectations.

In the Nasdaq market, ImClone Systems rocketed $6.97 to $44.90 after the biotech company said the drug Erbitux improved the survival rate of lung cancer patients in a late-stage study.

Among healthcare issues, Cephalon jumped $1.37 to $75.84 and Idexx Labs rallied $1.86 to $115.20.

Still, for many investors, optimism about the market’s outlook is rooted in expectations that the Fed next week will begin cutting its key rate, now 5.25%.

Tim Krause, director of risk management at Zecco Trading, said he wasn’t entirely convinced the Fed would ease credit, given that such a move could hammer an already weakened dollar.

The euro Tuesday reached $1.383, up from $1.381 on Monday and tying the record high it reached in July.

“The Fed is between a rock and a hard place,” Krause said. “If they lower interest rates, the dollar will keep getting crushed. If they don’t, the sub-prime mess will get worse and hurt the housing market.”

Some investors continued to rush into gold as an alternative to the sliding buck. Near-term gold futures in New York rose $8.90 to $712.20 an ounce. The price has surged $44 since Aug. 24.

In other trading, near-term crude oil futures in New York rallied 74 cents to a record $78.23 a barrel, surpassing the previous peak of $78.21 reached in July. Traders are betting that a planned boost in output by leading oil exporters won’t be enough to satisfy global demand.

In the Treasury bond market yields rose as some investors sold bonds to buy stocks. Yields have slumped in recent weeks on expectations for a slowing economy and a Fed rate cut.

The 10-year T-note ended at 4.37%, up from 4.32% on Monday, which was the lowest in nearly two years.

Among the day’s market highlights:

Energy stocks rising with oil prices included Exxon Mobil, up $2.08 to $86.94; Occidental Petroleum, up $1.22 to $59.90; and Chevron, up $1.54 to $88.59.

Gold-mining issues jumped with the metal. Newmont Mining gained $1.33 to $45.16; Agnico Eagle rose $1.27 to $50.

In the restaurant sector, IHOP surged $3.24 to $65.15 and Darden gained 73 cents to $41.24.

Financial issues were mixed. Citigroup rose 71 cents to $46.01 and Wells Fargo rallied 98 cents to $36.12, but Countrywide Financial slid 33 cents to $16.88 on renewed rumors that it is struggling to get the funding it needs.

Boeing added $2.11 to $97.44, helping the Dow. The plane maker said it was awarded a $1.1 billion U.S. Air Force contract.

In the tech sector, Cisco Systems rose 42 cents to $32.16, IBM jumped $1.55 to $117.35 and Microsoft was up 45 cents to $28.93.

In foreign trading, European markets were helped by Wall Street’s rally. The German market gained 1.1% and British shares jumped 2.4%.

Mexico’s key index rose 1%.

But the Shanghai composite, which last week hit a record high, slumped 4.5%.