U.S. dollar and stocks gain on economy

By Herbert Lash

NEW YORK (Reuters) - The dollar gained and U.S. stocks rallied more than 1 percent on Thursday on news of solid U.S. economic growth and a drop in oil prices despite the threat that powerful storm Gustav poses for the Gulf's energy infrastructure.

U.S. and European equity investors were cheered by a robust revision of second-quarter U.S. gross domestic product to 3.3 percent, up from an initial read of 1.9 percent, which had cast doubt on whether the United States was in or near recession.

Euro zone and U.S. government debt prices fell on the new number -- analysts had expected a 2.7 percent growth rate -- and stocks jumped as it fanned optimism in equity markets.

The improved economic outlook, together with the slide in oil prices, spurred investors to scoop up financial and retail stocks and jump into industrial shares such as Caterpillar (CAT.N), often cited as a bellwether for the U.S. economy.

Consumer spending and net exports were more robust than initially estimated, and inventories fell less sharply in the GDP report, the U.S. Commerce Department said.

"Today's data on GDP was encouraging, and that is what investors really want to see: a tick up in the economy," said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.

A separate government report showed the number of U.S. workers filing new claims for jobless benefits fell to a level that was a touch lower-than-expected.

Lower oil prices also supported equities. Earlier, oil rose above $120 a barrel, boosted by the threat Tropical Storm Gustav poses to U.S. oil installations in the Gulf of Mexico.