Shares rise after Fed chief Bernanke's comments, but oil drops

NEW YORK (Reuters) - Stock markets around the world rose on Wednesday after United States Federal Reserve chairman Ben Bernanke signaled that the US central bank's stimulus programme would remain intact.

In testimony to Congress, Mr Bernanke said the Fed's monetary policy was still providing significant benefits to the economy and that prematurely tightening it would carry substantial risks.

Shares were volatile, at one point jumping 1 per cent before paring those gains as Mr Bernanke said that economic improvement would lead the Fed to consider tapering its stimulus.

Analysts did not expect Mr Bernanke to announce any substantial change to policy, but his comment on a potential tapering of the Fed's stimulus programme caused stocks to come off their highs.

The Fed's policy is widely credited with contributing to the Standard & Poor's 500 Index's rally of nearly 18 per cent this year, a surge that has repeatedly taken it to all-time highs, including on Wednesday.

"He said exactly what Wall Street wants to hear. He's putting out there that there's no end in sight, which is exactly what we want and why stocks are bidding higher," said Mr Todd Schoenberger, managing partner at LandColt Capital in New York.

"With things continuing for quarters to come, summer doldrums seem unlikely this year."

The Dow Jones Industrial Average was up 94.98 points, or 0.62 per cent, at 15,482.56. The Standard & Poor's 500 Index was up 9.65 points, or 0.58 per cent, at 1,678.81. The Nasdaq Composite Index was up 14.75 points, or 0.42 per cent, at 3,516.87.

The MSCI all-country world equity index added 0.3 per cent while shares in Europe rose 0.1 per cent after earlier falling on weakness in luxury goods stocks.

The dollar index was up 0.4 per cent against a basket of major currencies, near a three-year high of 84.37 struck last week. The euro fell 0.2 per cent in a volatile session.

The dollar index is up nearly 5 per cent this year as investors favour the greenback on signs of growing economic momentum and talk of an early end to the huge US stimulus effort.

"The market's bias has been for dollar strength, but it is much more finely balanced now," said Ms Elsa Lignos, a senior currency strategist at RBC Capital Markets. "The reaction (to Mr Bernanke) seems much more likely to be influenced by flows and technicals than the fundamental outlook," she said.

The dollar's moves were also seen limited by expectations that minutes from the Fed's last rate-setting meeting will underscore the wide divergence between policymakers on the future of the bank's US$85 billion (S$106 billion) a month bond-buying plan.

"Bernanke's comments could see the dollar ease somewhat. But the Fed minutes are likely to be hawkish, so we expect the dollar to regain ground, especially against the yen," said Mr Marcus Hettinger, currency strategist at Credit Suisse.

The benchmark 10-year US Treasury note fell 12/32, the yield at 1.9718 per cent, erasing early gains after Mr Bernanke raised the possibility of reducing the Fed's bond purchases this year if economic growth improves further.

Japan's Nikkei Index climbed 1.6 per cent to a 51/2-year high after the Bank of Japan, as widely expected, maintained an aggressively loose policy that will inject up to US$1.4 trillion into the financial system.

That kept the yen weaker against the dollar, which gained 0.4 per cent to 102.85 yen.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.3 per cent.

The debate over the Fed's next moves, and particularly the potential impact on the dollar and on growth, also dominated commodity markets.

Gold, traditionally seen as an inflation hedge and alternative to the dollar, was up 2.3 per cent after Mr Bernanke's comments, while copper rose to its highest level in two weeks.

But oil dropped 0.8 per cent on data showing a surprise jump in US gasoline stocks, suggesting that summer US demand might not meet supply. US crude futures fell 1.3 per cent.