"Yesterday, we had a perfect storm of negative news, and today it's viewed as a storm of positive news for the market," said Donald Selkin, chief market strategist at Joseph Stevens.
The Dow Jones Industrial Average rallied 140 points, or 1.2%, to 12,226, with 26 of its 30 components advancing, led by such financial components as AIG , Citigroup and J.P. Morgan Chase .
"The dollar is strong, oil is down, so we're getting less inflationary pressures," Selkin said. "That's been weighing on [the market] for a while and also on financial shares."
The recent surge in crude oil prices and other commodities has raised concerns about U.S. consumers, the economy and inflation, lifting market odds that the Federal Reserve will hike interest rates later this year.
Higher rates tend to pressure financial firms, which rely on overnight borrowings in order to lend money.
Shares of Lehman Brothers fell more than 4% after the investment firm said that Chief Financial Officer Erin Callan and Chief Operating Officer Joseph Gregory are leaving their posts.
Lehman stock has been buffeted lately as investors question the firm's capital position and its transparency amid the ongoing credit crisis. .
Separately, strategists at Morgan Stanley raised their rating on financial stocks from underweight to neutral, while growing more cautious on energy stocks.
Before the Lehman news, the market received a boost from a $46 billion takeover bid for Anheuser-Busch , a big decline in oil prices and a rise in retail sales, which helped set the stage for a rebound from the last session's rout.
U.S. stocks stumbled Wednesday, with the Dow industrials sliding more than 200 points as nervousness returned to the financial sector and oil prices shot higher by over $5 a barrel.
Pain in the financial sector was still evident Thursday: Jumbo loan provider Thornburg Mortgage reported a $3.3 billion loss; KeyCorp said it is cutting its dividend and raising $1.5 billion in equity capital; and Citigroup is closing a hedge fund co-founded by CEO Vikram Pandit only 11 months after buying it for more than $800 million.
The dollar posted strong gains after the upbeat retail sales data and ahead of the weekend's G-8 meeting, where investors believe a strong statement will be issued in support of the U.S. currency.
The dollar index, which measures the U.S. unit against a benchmark of major rivals, was up 1%. A strong dollar pressures dollar-denominated commodities, such as crude oil and gold, as it makes them more expensive for holders of other currencies.
Crude oil futures were recently down $2.94, or 2.2%, to $133.44, pressured by the firm dollar and after news that weekly natural gas inventories rose.
In addition to retail sales, nervousness before the Irish referendum on the Lisbon treaty hurt the euro, also boosting the dollar.
Retail sales surprise
Jumpstarted by an infusion of nearly $50 billion in stimulus checks from Uncle Sam, retail sales rose a surprising 1% in May, the fastest increase in six months, the Commerce Department reported Thursday. The gain was above the 0.6% expected by economists surveyed by MarketWatch. Excluding autos, sales rose 1.1% compared to an expected 0.8% increase. .
Sales were boosted by higher gasoline and food prices, and by eye-catching gains at building materials stores and furniture stores. Also of note, prices of goods imported into the U.S. rose 2.3% in May, the Labor Department reported Thursday, with elevated prices for petroleum and natural gas mostly behind the gain.
Separately, the Labor Department said jobless claims ros 25,000 to 384,000 in the week ended June 7.
By Nick Godt