The Dow industrials gained for a sixth straight session to hit an intraday 17-month high, while a major pan-European stock index surged to a 17-month closing high.
The US dollar fell against higher-yielding currencies such as the Australian dollar, while the yen weakened as commitments by both the Fed and the Bank of Japan to low rates instilled confidence in investors to seek higher returns elsewhere.
"Investors like knowing where rates are going to be for at least the next three months," said Marc Pado, US market strategist at Cantor Fitzgerald & Co. in San Francisco. "Knowing we have that stable environment to look forward to is what's lifting stocks." The US Labor Department said the index for prices paid at the farm and factory gate fell 0.6 percent last month, the largest decline since July, after a 1.4 percent increase in January. The decline in producer prices, led by tumbling energy costs, reinforced views that inflation is not a worry and the Federal Reserve will stick to keeping interest rates ultra-low for an extended period.
The Chicago Board Options Exchange volatility index, a gauge of investor sentiment better known as the Vix, fell more than 5 percent to lows last seen in May 2008. The Vix, a 30-day risk forecast, typically moves inversely to the S&P 500 stock index. A lower reading suggests there is a greater desire in the markets to take risk.
A similar European gauge, the VDAX-NEW volatility index, fell 2 percent.
MSCI's all-country world stock index rose almost 1 percent.
The pan-European FTSEurofirst 300 index of regional shares rose 0.92 percent to end at 1,070.90 points, its highest close since October 2008.
At 1 p.m., the Dow Jones Industrial Average was up 48.98 points, or 0.45 percent, at 10,734.58. The Standard & Poor's 500 Index was up 7.06 points, or 0.61 percent, at 1,166.52. The Nasdaq Composite Index was up 14.88 points, or 0.63 percent, at 2,392.89.
Despite the new highs in a stock rally from decade lows a year ago, investors remained cautious as the recovery from the deepest global recession since World War II remained weak.
"Governments and central banks have put massive fiscal and monetary stimulus into the system. The big question for this year is what happens when they withdraw it," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
"This rally, which we still consider to be a bear market rally, has gone quite a bit further than we thought," he said.
US government debt prices traded near break-even as the rally in world equity markets reduced the safe-haven appeal of bonds and helped to erase earlier gains tied to the hefty drop in producer prices.
Benchmark 10-year notes rose 1/32 in price to yield 3.65 percent.
The euro fell from five-week highs against the dollar as sentiment remained negative on the euro zone single currency despite pronouncements of support by European Union members for debt-strapped Greece.
"If you look at the broader picture, we're seeing most major currencies - sterling, Australian and New Zealand dollars - rallying against the US dollar. Clearly, risk appetite is up," said John McCarthy, director of FX trading at ING Capital Markets in New York.
The euro was down 0.05 percent at $1.3762. The dollar was down against major currencies, with the US Dollar Index off 0.20 percent at 79.597.
Gold prices retreated from earlier gains. Spot gold prices fell 75 cents at $1,123.90 an ounce.
Earlier, Japan's Nikkei closed up 1.17 percent, boosted by the BoJ's decision to loosen monetary policy.
