Global stocks and the dollar rebounded on Friday, buoyed at first by US and Chinese data, but Federal Reserve Chair Janet Yellen later rattled investors when she said aggressive steps may be needed to address an economy whose potential is slipping.
The dollar posted its largest weekly rise in more than seven months, with rebounding US retail sales and a rise in producer prices last month indicating the economy had regained momentum in the third quarter after a lackluster first-half.
Stocks in Europe rose more than 1 per cent and an index of global equities gained. But stocks on Wall Street pared gains to close just above break-even, while yields on longer-dated US Treasuries ticked up, with the benchmark 10-year note edging above 1.8 per cent.
Yellen, who posed her comments in Boston as questions that need more research, also suggested the US central bank may allow inflation to exceed its 2 per cent target.
Yellen's remarks suggest she embraces the thinking of former US Treasury Secretary Larry Summers who has said secular stagnation, or a lack of demand, is crimping global growth, said Jeffrey Gundlach, chief executive of DoubleLine Capital.
"I didn't hear, 'We are going to tighten in December,'" Gundlach told Reuters.
Peter Kenny, senior market strategist at Global Markets Advisory Group in New York, said Yellen has kept everyone guessing as to when the next rate hike will occur, which has led to an inconsistent and trendless trading pattern in equities.
"If the markets have a fit, they're not going to hike. If the markets are going to have smooth sailing until December, 'yes,' we'll hike," said Axel Merk, president and chief investment officer of Merk Investments in Palo Alto, California.
"She's going to look for every excuse not to hike rates."
The Dow Jones industrial average .DJI closed up 39.44 points, or 0.22 per cent, to 18,138.38. The S&P 500 .SPX rose 0.43 points, or 0.02 per cent, to 2,132.98 and the Nasdaq Composite .IXIC added 0.83 points, or 0.02 per cent, to 5,214.16.
For the week, the Dow fell 0.56 per cent, the S&P 500 slid 0.96 per cent and the Nasdaq slipped 1.48 per cent.
The dollar index, which tracks the greenback against a basket of six major currencies, added 0.57 per cent to 98.069 .DXY and was up 1.5 per cent for the week.
Against the yen, the dollar rose 0.44 per cent to 104.14 JPY=, while the euro fell 0.77 per cent to $1.0971 EUR=.
Chinese producer prices and US economic data had bolstered expectations earlier in the session that the Fed would raise interest rates in December.
US producer prices rose in September to post their biggest year-on-year rise since December 2014, while retail sales gained 0.6 per cent after a 0.2 per cent decline in August.
In China, September producer prices unexpectedly rose for the first time in nearly five years and consumer inflation also beat expectations, easing some concerns about the health of the world's second-biggest economy.
Disappointing Chinese trade data on Thursday had rattled investors and pushed global equity markets to three-month lows.
European shares tracked Asian markets higher and Wall Street initially jumped as strong results from JPMorgan and Citigroup lifted financial stocks. Shares later pared gains.
Shares of JPMorgan (JPM.N), the biggest US bank by assets, fell 0.32 per cent after it beat forecasts for revenue and profit. Citigroup (C.N) rose 0.29 per cent after earnings fell less than expected.
In Europe, the pan-regional FTSEurofirst 300 .FTEU3 index rose 1.33 per cent to close at 1,341.54, while MSCI's all-country world index .MIWD00000PUS of equity markets in 46 countries rose 0.30 per cent.
Oil slipped below $52 a barrel, giving up earlier gains, as abundant crude supplies outweighed tighter US fuel inventories and plans by the Organization of the Petroleum Exporting Countries to cut output.
Global benchmark Brent LCOc1 settled down 8 cents at $51.95 a barrel. US crude CLc1 slid 9 cents to settle at $50.35 a barrel.
US Treasury yields rose, with the benchmark 10-year note US10YT=RR falling 19/32 in price to yield 1.8048 per cent.
The benchmark 10-year German bund DE10YT=TWEB rose 2 basis points to 0.05 per cent, according to Reuters.