Dovish words from Ben Bernanke triggered a global rally that took U.S. stocks to new closing highs and sent the dollar into its worst two-day decline in four years.
Gold also rebounded, jumping almost 3 percent, while bond prices moved higher. The dollar index fell 1.6 percent to 82.66, its worst day since October 2011; it is down 2.3 percent in the past two days.
The Fed chairman spoke after Wednesday's close, but his words resonated in markets around the world Thursday as traders took away reassurances that the central bank would not move any more quickly than expected to end its bond purchase program and, more importantly, that it is not moving up its time frame to raise short-term interest rates.
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Treasury yield rates slipped after Bernanke spoke and continued to fall Thursday, with the 10-year at 2.57 percent in late trading. But yields at the long end steadied and stocks got a further boost after the Treasury released data showing the biggest June budget surplus ever—$117 billion, against analysts expectations of $39.5 billion.
The next target traders are watching for the Dow is the May 22 all-time intraday high of 15,542, and for the S&P, it is the 1687 level from May 22. The Nasdaq, meanwhile, has been quietly outperforming, and it is up 11 of the last 12 sessions. The Nasdaq rose 1.6 percent to 3578 Thursday, and it is up more than 5 percent for the month so far.
"It's a nice move. I didn't expect it," said Laszlo Birinyi of Birinyi Associates. The milestones for the Dow and S&P are not that meaningful, he said, though he remains bullish and expects the S&P to be at 1700 by year-end. Stock traders have been keeping a wary eye on Treasury yields, which had hit a high above 2.7 percent last week.
"I'm not concerned about rates because the market is not concerned about rates. What I will be concerned about is when the market sells off with no news," Birinyi said.
The market may be pricing in something new now that it has managed to score big gains even as interest rates hold at higher levels, Birinyi said. "Maybe they're pricing in part 2—that things are getting better." He pointed to interesting moves in stocks, like Amazon, which crossed 300 for the first time Thursday, and Priceline.com, up 18 points, or 2 percent.
The next hurdle for stocks is the earnings period, which started this week with a report from Alcoa that was slightly better than expected. Wells Fargo and J.P. Morgan report ahead of the opening bell Friday.
The markets will also be watching producer prices at 8:30 a.m. and consumer sentiment at 9:55 a.m. ET.
"None of this stuff is really about the Fed," said Barry Knapp, head of equity portfolio strategy at Barclays. "It's really about the data getting better, when you think about what caused the bond market to move 111 basis points."
Knapp said the moves higher in rates really started with jobs data, not Fed officials speaking about tapering their quantitative easing bond purchases. "When you reach this inflection point, where the labor market is getting better, the Fed goes along for a ride and they're going along for a ride this time too."
Knapp expects to see the market sell off in waves, as it adjusts to a new higher rate environment. That has been the pattern in other tightening cycles, he said.
"The Fed gets a big move for a day or two. That's why you have to be careful with the S&P up 20 points. Usually, these are the moves that have been reversed," he said. "I still think we're in the midst of the correction."
There are three Fed officials speaking Friday, including Philadelphia Fed President Charles Plosser and St. Louis Fed President James Bullard, who are on a panel on monetary policy at 2:45 p.m. ET at the Rocky Mountain Economic Summit in Jackson Hole, Wyo.
San Francisco Fed President John Williams speaks at 5:15 p.m. ET in Vancouver. His topic is a defense of moderation in monetary policy.
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Analysts said Bernanke did not say anything new and that the Fed is still likely to cut back on its $85 billion a monthly in bond purchases starting in the fall. But traders read him as being more dovish anyway.
"They're going to be disappointed," said Knapp. "Bernanke's going to give a speech next week, and he's going to indicate they are on track for September tapering. We think all he was trying to say was just what they were all trying to say in their last eight speeches. … Asset purchases are not nearly as important as their interest rate guidance."
—By CNBC's Patti Domm. Follow her on Twitter