NEW YORK Global stocks advanced to their highest levels since September on Tuesday on signs of compromise in U.S. talks to stop automatic tax hikes and spending cuts that could hurt the economy next year.
With confidence rising that lawmakers would avert the "fiscal cliff," investors shifted funds to stocks and the euro and pulled away from assets traditionally viewed as safe harbors like bonds, gold and the U.S. dollar. The euro hit a 7-1/2 month high against the greenback while gold fell almost 2 percent to its lowest since August.
Wall Street rallied on strong volume, capping off the S&P 500's best two-day run in a month, on confidence that a deal would be struck in Washington to avoid painful spending cuts and tax hikes.
Banking, energy and technology - sectors that would benefit during economic expansion - led gains as investors were confident that lawmakers will come to an agreement to avoid the end-of-year deadline.
The PHLX oil services sector index jumped 3.1 percent, with eight of its 15 components up 3 percent or more.
"The view is that the economy is getting better, and that is always good for energy demand," said Shawn Hackett, president at Hackett Financial Advisors in Boynton Beach, Florida.
Hackett said the United States would avoid "whatever the 'cliff' means" for the economy, allowing investors to focus on growth.
President Barack Obama's most recent offer to Republicans in the ongoing budget talks makes concessions on taxes and social programs spending. House Speaker John Boehner said the offer is "not there yet," though he remains hopeful about an agreement. Senate Democrats, however, have expressed concern about cuts to Social Security.
For a second day, banks led the rally on Wall Street. Goldman Sachs Group was up 3.5 percent and Morgan Stanley gained 3.2 percent after Jefferies Group reported a higher-than-expected adjusted quarterly profit.
The Dow Jones industrial average closed up 115.57 points, or 0.87 percent, at 13,350.96. The Standard & Poor's 500 Index was up 16.43 points, or 1.15 percent, at 1,446.79. The Nasdaq Composite Index was up 43.93 points, or 1.46 percent, at 3,054.53.
European shares ended higher, with a key index closing just a few points below its 2012 high.
The euro rose against the dollar for a seventh straight session on Tuesday, hitting its highest level in more than seven months.
The euro was last up 0.5 percent at $1.3224 (8136 pence) after hitting a high of $1.3238 (8145 pence), its strongest level since early May. The dollar index fell to a two-month trough of 79.260. The index was last quoted at 79.342, down 0.3 percent.
Oil prices rose. Front-month Brent crude oil prices rose $1.20 (74 pence) to settle at $108.84 a barrel, briefly topping the 14-day moving average of $108.87 a barrel.
January U.S. crude oil futures gained 73 cents to settle at $87.93 a barrel, breaking above the 50-day moving average of $87.64 a barrel after testing that level during Monday's trade.
Among other assets, gold, seen as a safe haven, tumbled, with spot gold down 1.9 percent at $1,666.90 an ounce.
U.S. Treasury yields rose to their highest since October. The benchmark 10-year U.S. Treasury note was down 15/32, with the yield at 1.824 percent.
(Reporting by Angela Moon; Editing by Dan Grebler)