Dollar and stocks rally as Bernanke calms markets

By Herbert Lash

NEW YORK (Reuters) - Stocks and the dollar shrugged off recent weakness from credit concerns and moved higher on Tuesday as Federal Reserve Chairman Ben Bernanke reassured investors about liquidity for banking system needs and oil took another inflation-dampening tumble.

Signs that investors still fear the impact of a lingering credit crunch could be seen in Europe, where stocks fell and euro zone government bonds advanced amid worries about further potential write-downs by banks.

Trading started on a weaker note on Wall Street as a sharper-than-expected decline in pending U.S. home sales in May signalled more trouble for the beleaguered housing market and supported a rise in fixed-income markets.

But Bernanke bolstered the market with a speech saying that the U.S. central bank may extend emergency lending facilities for big Wall Street banks past year-end as it seeks to restore financial market stability.

"What Bernanke's saying is helping Wall Street, and that's helping the dollar," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York. "Everybody thinks the Fed's No. 1 mandate is to fight inflation, but it's actually to make sure the banks are solid.

"What they're trying to do is avoid a panic on Wall Street, and in the near term that's dollar-positive," he added.

Bernanke's comments stopped a sell-off in financial stocks on Monday when Lehman Brothers estimated a proposed accounting rule could force Fannie Mae and Freddie Mac billions in fresh capital. Some thought the market reaction was overdone since Lehman said itself said it doubted an accounting change detrimental to the two largest U.S. mortgage lenders would be enacted.

The S&P financial index rose more than 2 percent.