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GLOBAL MARKETS-Stock markets extend gains as policymakers pull out all the stops

* Wall Street gains as policymakers pulled out all the stops

* Dollar surges to highest since January 2017

* ECB launches 750 billion-euro asset purchase program

* Euro STOXX 600 rises in volatile trade

* Asian stock markets : tmsnrt.rs/2zpUAr4

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

WASHINGTON/LONDON, March 19 (Reuters) - European and U.S. stocks extended gains on Thursday after initially dropping, in a sign of tentatively more stable markets, as the Federal Reserve and other central banks across the world moved to stem a coronavirus-induced financial rout.

The most recent move by the Fed to boost liquidity in tight markets, especially trading for Treasury securities, helped calm jittery investors and lift the dollar to a fresh three-year high against a basket of major currencies.

The Fed increased the access to dollars for central banks in nine countries so contracts in key commodities and other goods that are made in the U.S. currency can be done, helping to loosen particularly tight bond markets.

The U.S. central bank said the swaps, in which the Fed accepts other currencies as collateral in exchange for dollars, will be in place for at least the next six months.

The swaps will allow the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to tap a combined total of up to $450 billion to help ensure the world’s dollar-dependent financial system functions.

The collateral to purchase crude oil, for example, is U.S. Treasury debt and to buy those securities requires dollars, said Michael Skordeles, U.S. macro strategist at Truist/Suntrust Advisory Services in Atlanta.

“All these things kind of happening at once causes a lot of dominoes to fall, and as the dominoes fall, it creates more demand, pushing people toward the dollar,” Skordeles said.

“This (the dollar swap lines) is going to help, but it’s not a silver bullet,” he said. “Because there’s a flow of capital into dollar-denominated assets, in particular U.S. Treasuries, it’s starving these countries of liquidity and making the dollar appreciate.”

U.S. oil prices surged about 25%, recouping some losses from a sell-off that drove prices to near 20-year lows over the past month, but analysts saw the rebound as a brief reprieve from the economic tsunami the virus is expected to cause.

On Wall Street, the benchmark S&P 500 climbed 52.23 points, or 2.18%, to 2,450.33 and the Nasdaq Composite surged 286.48 points, or 4.1%, to 7,276.32.

The Dow Jones Industrial Average rose 254.89 points, or 1.28%, to 20,153.81. As of the prior session, nearly all of the Dow’s gains since President Donald Trump’s 2017 inauguration had been wiped out as the widening repercussions of the coronavirus pandemic threatened to cripple economic activity.

The meltdown had pushed Wall Street’s three main indexes down about 30% as of Wednesday from their record closing highs last month.

The pan-European STOXX 600 index rose 2.91% and MSCI’s gauge of stocks across the globe gained 0.67%.

TREASURY YIELDS FALL IN VOLATILE TRADE

Global bond prices gyrated with desperate investors dumping government bonds and hoarding cash in markets gripped by pandemic fears that have forced central banks to step up support for debt.

U.S. Treasury yields largely fell in volatile trading, a sign the Fed’s efforts were working.

The dollar continued its rally as investors rushed to secure liquidity. The British pound was down in choppy trade and slipped past the previous day’s trough to the lowest since 1985.

Bond markets stabilized somewhat after the European Central Bank pledged late Wednesday to buy 750 billion euros ($820 billion) in sovereign debt through 2020. That brought the ECB’s planned purchases for this year to 1.1 trillion euro.

Government bond yields in Italy and across the euro zone dropped after the ECB’s emergency measures, though European stocks fell back into negative territory after arresting their rout in early trading.

Expected price swings for some of the world’s biggest currencies rocketed to multi-year highs as the demand for dollars forced traders to dump currencies across the board.

For the British pound versus the dollar, expected volatility gauges leapt to 24.4%, their highest level since before the 2016 Brexit vote.

“One unresolved and really critical issue is what’s going on in volatility,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “I think that volatility needs to stabilise before the broader market can heal.”

Italy, which has seen its borrowing costs jump in recent days, led the drop in yields after the ECB move.

The gap over the safer German Bund’s yields tightened.

The U.S. Fed earlier promised a liquidity facility for money market mutual funds, and Australia’s central bank slashed interest rates to a record low of 0.25%.

Traders reported huge strains in bond markets, however, as distressed funds sold any liquid asset to cover equity losses and investor redemptions.

Benchmark 10-year sovereign bond yields in New Zealand, Malaysia, Korea, Singapore and Thailand surged as prices fell, and U.S. 10 year Treasuries rose 10 basis points through the session.

The coronavirus pandemic has killed almost 9,000 people globally, infected more than 218,000 and prompted widespread emergency lockdowns.

Gold dropped 1.1% and like other assets was buffeted by volatility. Copper, a gauge of global economic health, hit its down-limit in Shanghai, and London futures traded in London fell to their lowest since 2016. For Reuters Live Markets blog on European and UK stock markets, please click on:

Reporting by Tom Wilson in London and Chris Prentice in Washington; Additional reporting by Herb Lash in New York, Tom Westbrook in Singapore and Sujata Rao in London; Editing by Nick Zieminski and Bernadette Baum

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