* Surprise Fed rate hike unsettles, then cheers markets
* Dollar climbs as higher rates benefit dollar assets
* Stocks gain on view rate hike sign of economic recovery
* Bonds edge higher on soothing Fed comments, benign CPI (Adds close of U.S. markets)
By Herbert Lash and Al Yoon
NEW YORK, Feb 19 (Reuters) - The dollar gained broadly and stocks edged higher worldwide on Friday after investors swept aside negative views of a surprise move by the U.S. Federal Reserve to hike an emergency lending rate and took it as a sign of a healing economy.
Stocks on Wall Street closed out their best week of the year after a zig-zag session as investors weighed the Federal Reserve decision late Thursday to raise its discount rate for banks by one-quarter percentage point to 0.75 percent. For details see: [ID:nN19153420]
U.S. Treasuries rebounded, too, from early losses as bond investors took comfort in comments by Fed officials who said the rate hike did not herald a shift in monetary policy and that borrowing costs would remain low. [ID:nN18218950]
Investors also were encouraged after the government reported U.S. inflation rose less than expected in January.
Currency traders, however, read the rate decision as a signal that the U.S. central bank was coming closer to the day it tighten its benchmark rate. The U.S. dollar rallied, as higher rates increase the return on dollar-denominated assets.
"The markets are taking this as a clear step towards normalization in monetary policy," said Meg Browne, a currency strategist at Brown Brothers Harriman in New York. "If you combine the Fed actions with the fundamentals of the U.S. economy and contrast it with the situation in Europe, dollar buying is more than justified."
The euro
U.S. stocks closed higher after a see-saw session in which investors worried the eventual withdrawal of easy money will hurt Wall Street. [ID:nN19241573]
"Investors know the Fed is marching toward a hike. The question is, Is it a long or a short march?" said Quincy Crosby, market strategist at Prudential Financial in Newark, New Jersey.
The KBW bank index <.BKX> rose 1.2 percent on sentiment that the Fed move indicates improved financial conditions that warrant less of a helping hand from the U.S. central bank.
Charles Lieberman, chief investment officer of Advisors Capital Management in Paramus, New Jersey, said the Fed action "would suggest a recovering economy, and a financial system that can withstand higher interest rates."
The Dow Jones industrial average <.DJI> closed up 9.45 points, or 0.09 percent, at 10,402.35. The Standard & Poor's 500 Index <.SPX> was up 2.42 points, or 0.22 percent, at 1,109.17. The Nasdaq Composite Index <.IXIC> was up 2.16 points, or 0.10 percent, at 2,243.87.
The MSCI world equity index <.MIWD00000PUS> declined 0.48 percent, cutting session losses by half, after hitting a two-week peak hit on Thursday.
The dollar climbed across the board, rising against a basket of major currencies. The U.S. Dollar Index <.DXY> was up 0.21 percent at 80.569, after earlier touching an eight-month high. [ID:nN19120591].
Against the yen, the dollar
Oil prices rose toward $80 a barrel, as French refinery strikes and tensions about Iran's nuclear program outweighed fears that U.S. monetary tightening could slow demand growth in the United States, the world's largest oil consumer.
U.S. crude for March delivery
In London, ICE Brent crude for April
Gold prices reversed early losses, fueled by the stronger dollar as investors bought the metal to hedge against currency volatility and debt default risks in Europe. [ID:nLDE61I0XU]
U.S. gold futures for April delivery
U.S. Treasury debt prices were higher. The benchmark
10-year U.S. Treasury note