* U.S. dollar hits lowest level vs euro since Oct
* Wall St closes higher after late-day rally
* European shares end lower on U.S data, weak earnings
* Oil bounces 8 pct as dollar tumbles
* 10-year Treasury yields fall to 1-year low before
recovering
(Adds close of U.S. markets)
By Lewis Krauskopf
NEW YORK, Feb 3 (Reuters) - The U.S. dollar tumbled on
Wednesday after comments from a Federal Reserve official and a
soft services sector report suggested a slowing pace of rate
hikes, sparking a rally in oil prices that also boosted U.S.
equities.
U.S. crude settled up 8 percent as the weakness in the
dollar helped oil and other commodities priced in the currency.
U.S. Treasury yields fell to one-year lows before recovering.
The Dow Jones industrials closed up 1.1 percent, helped by
oil stocks, in a volatile day which saw the key index sway in a
420-point range.
"The 8-percent rise in oil and the weakening dollar are the
two things that seem to be kind of winning the day in terms of
finally moving stocks into the plus side," said Chuck Carlson,
chief executive at Horizon Investment Services in Hammond,
Indiana.
The Dow Jones industrial average .DJI rose 183.12 points,
or 1.13 percent, to 16,336.66, the S&P 500 .SPX gained 9.5
points, or 0.5 percent, to 1,912.53 and the Nasdaq Composite
.IXIC dropped 12.71 points, or 0.28 percent, to 4,504.24.
Activity in the vast U.S. services sector slowed to a near
two-year low in January, suggesting that economic growth
weakened further at the start of the first quarter even as the
labor market remains resilient.
The pan-European FTSEurofirst 300 index .FTEU3 fell 1.6
percent amid disappointing earnings from Finnish
state-controlled utility Fortum FUM1V.HE and Dutch telecoms
group KPN KPN.AS .
MSCI's 46-country All World share index .MIWD00000PUS was
flat.
Equities have been tightly correlated with oil in recent
weeks as the commodity's 1-1/2-year slide has deepened, with
investors worried oil's slide is a sign of shakiness in the
global economy.
Oil rose Wednesday after investors took advantage of a drop
in the U.S. dollar and earlier weakness in the crude price,
despite weekly data showing a surprisingly large rise in U.S.
inventory. Russia also repeated its willingness to take part in
talks with OPEC producers to cut output.
U.S. crude CLc1 settled up 8 percent at $32.28 a barrel,
while benchmark Brent crude LCOc1 settled up 7.1 percent to
$35.04 a barrel.
"We're getting the rally in crude oil from the pounding that
the dollar is taking," said Robert Yawger, senior vice president
of energy futures at Mizuho Securities USA.
Financial conditions have tightened considerably in the
weeks since the Fed raised interest rates and monetary
policymakers will have to take that into consideration should
that phenomenon persist, William Dudley, president of the
Federal Reserve Bank of New York, told MNI in an interview.
Dudley's comments, combined with the services sector data,
raised skepticism about the Fed's ability to further raise
rates, weighing on the dollar.
According to CME FedWatch, the probability of a Fed rate
hike by December is now down to just 39 percent.
"Fed rate forecasts are coming under fire," said Joe
Manimbo, senior market analyst at Western Union Business
Solutions in Washington, in reference to Fed policymakers'
December forecast of four rate hikes this year.
The dollar .DXY fell 1.7 percent against a basket of
currencies - its biggest single session loss in two months -
while also touching a three-month low. The euro EUR= gained
1.8 percent against the dollar and hit its highest level since
October.
Benchmark 10-year note yields US10YT=RR were last down
6/32 in price to yield 1.8826 percent. At one point, yields fell
below technical resistance to a low of 1.7930 percent, the
lowest since February 5, 2015.