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Wall Street stock indexes made a dramatic recovery, closing sharply higher after an earlier sell-off on Thursday while the dollar gave up earlier gains as investors poured back into riskier bets after digesting a red-hot U.S. inflation reading that fueled bets for a big Federal Reserve rate hike next month.

Traders reversed course after initially flipping to safety mode when the U.S. Labor Department's consumer prices index (CPI) report showed headline CPI gaining 8.2% annually as rents surged by the most since 1990 and food prices rose. Core CPI, which excludes food and fuel prices, beat forecasts at 6.6%.

The dollar fell against most currencies as investors ended up taking the opposite approach to the market's initial response to the data. The greenback had briefly hit a 32-year peak against the yen of 147.665 before paring gains. [FRX]

On Wall Street, the S&P 500 closed the session up 2.6% after declining 5.7% in the previous six sessions. Earlier Thursday it fell 2.3% to its lowest level since Nov. 2020. [.N]

"When you have that big of a shock that it moves that fast, it's not unusual for it to get a little bit overdone. That might actually be a good sign we're not seeing follow-on selling," said Shawn Cruz, head trading strategist at TD Ameritrade in Chicago, referring to stock index moves.

While the data implies that the Fed will continue with sizeable rate hikes, Cruz said the market retracement "gives a sense there's a large enough pool of investors out there who weren't caught off guard ... that maybe we are getting down to levels, where a lot of the pessimism is already priced in."

The Dow Jones Industrial Average rose 827.87 points, or 2.83%, to 30,038.72, the S&P 500 gained 92.88 points, or 2.60%, to 3,669.91 and the Nasdaq Composite added 232.05 points, or 2.23%, to 10,649.15.

The pan-European STOXX 600 index rose 0.85% and MSCI's gauge of stocks across the globe gained 1.69%. The MSCI index had earlier lurched to a July 2020 low.

Global markets have been extremely volatile recently as investors have worried that major economies will be pushed firmly into recessions before inflation is tamed.

After Thursday's inflation data, traders were betting that the Fed would raise interest rates sharply in three weeks' time and ultimately lift rates to 4.75%-5% by early next year.

Benchmark Treasury yields jumped to 14-year highs after the hot inflation data added fuel to recession fears. But rates pared gains as U.S. equities rallied with some strategists pointing to short-covering in over-sold markets.

Benchmark 10-year notes were up 5.6 basis points to 3.958%, from 3.902% late on Wednesday.

The euro was rallying after falling as much as 0.72% against the dollar as nervous investors had turned to the safety of the greenback in their initial reaction to the data.

The euro was rallying after falling as much as 0.72% against the dollar as nervous investors had turned to the safety of the greenback in their initial reaction to the data. Recently though the euro up 0.74% to $0.9776.

The Japanese yen had last weakened 0.24% versus the greenback at 147.24 per dollar, while Sterling was last trading at $1.1324, up 1.99% on the day.

Setting off a rally for the battered pound, media reports suggested British Prime Minister Liz Truss was considering reversing more of her government's controversial "mini-budget."

The Bank of England said central counterparties in its financial system were resilient after its first public stress test. It has insisted its emergency bond market support will expire on Friday as originally announced, countering media reports of continued aid if necessary.

While crude oil had a volatile session, the commodity settled sharply higher as low levels of diesel inventory ahead of winter helped investors shrug off higher-than-expected stocks of crude and gasoline. U.S. crude futures had fallen 5.8% in the three straight sessions through Wednesday on demand worries.

U.S. crude settled up 2.1% at $89.11 per barrel and Brent settled at $94.57, up 2.3% on the day. [O/R]

Elsewhere in commodities, gold fell slightly in reaction to the inflation reading. Spot gold dropped 0.4% to $1,665.75 an ounce. U.S. gold futures fell 0.25% to $1,670.00 an ounce.