* Strong U.S. home sales eclipse disappointing Q3 GDP
* Dollar hits 2-month high against yen as rates seen rising
* Gold hits 7-week low as dollar strengthens
By Walter Brandimarte
NEW YORK, Dec 22 (Reuters) - European shares hit a 14-month closing high on Tuesday and U.S. stocks gained as surprisingly strong sales of previously owned U.S. homes boosted optimism about an economic recovery, also driving up the dollar.
The confidence in the economy drove down U.S. Treasuries prices for a second consecutive day as investors moved away from lower-risk assets.
The dollar hit a two-month high against the Japanese yen and traded near a 3-1/2-month high against the euro as investors speculated the U.S. Federal Reserve may be forced to raise interest rates sooner than forecast.
U.S. existing home sales jumped 7.4 percent in November to an annual rate of 6.54 million units, the fastest pace since February 2007. Economists had expected sales at a pace of 6.25 million units. For more, see [ID:nN22392364]
The housing data outweighed a disappointing final reading for U.S. third-quarter gross domestic product, which the government said expanded at an annual pace of 2.2 percent, below the 2.8 percent it had reported last month.
"Further improvement in the housing market is likely to lend support to the equity market as we finish the year," said Alan Gayle, senior investment strategist at RidgeWorth Investments in Richmond, Virginia.
"The housing market has been a key concern for equity investors all this year, so further progress is an encouraging sign as we get ready to start 2010."
The housing data boosted construction shares, driving the Dow Jones U.S. Home Construction index <.DJUSHB> up 2.9 percent.
The Dow Jones industrial average <.DJI> gained 44.67 points, or 0.43 percent, to 10,458.81, while the Standard & Poor's 500 Index <.SPX> rose 2.89 points, or 0.26 percent, to 1,116.94. The Nasdaq Composite Index <.IXIC> was up 9.39 points, or 0.42 percent, at 2,247.05.
The S&P 500 briefly hit a 14-month high, but the stronger dollar limited the broader market advance and pressured sectors like energy and other natural resources.
In Europe, the FTSEurofirst 300 <.FTEU3> index of top shares rose 0.7 percent 1,035 points, its highest closed since Oct. 3, 2008.
The pan-European index is up more than 24 percent so far this year and up more than 60 percent from its lifetime low hit last March.
Energy shares in Europe gained on Tuesday even as oil
prices declined. Heavyweights BP
U.S. crude oil prices
DOLLAR KEEPS RALLYING
Higher Treasuries yields and expectations of a stronger U.S. economic rebound allowed the dollar to keep strengthening against major currencies.
Against the Japanese yen
The euro
"The stronger housing market number helped dollar bulls regain control," said Kathy Lien, director of currency research at GFT Forex in New York.
"Any negative sentiment from the U.S. GDP report was offset by another strong month for existing home sales."
Sterling slipped to a more than two-month low of $1.5924
The stronger dollar also encouraged investors to sell gold,
which fell below $1,080 per ounce to its lowest level since
early November. Spot gold prices
The economic optimism drove investors away from U.S. Treasuries for the second consecutive day, but analysts said the moves were exaggerated by very thin volumes in a holiday-shortened week.
The benchmark 10-year Treasury note
The Treasury yield curve remained at record steep levels, with the spread between two-year note yields and 10-year note yields holding at its widest on record at 285 basis points. (Additional reporting by Ellis Mnyandu, Chris Reese and Wanfeng Zhou; Editing by Leslie Adler)