By Ryan Vlastelica
NEW YORK (Reuters) - Stocks, bonds and currencies took a wild ride on Wednesday after Federal Reserve Chairman Ben Bernanke said the U.S. central bank's massive bond-buying program would remain in place for now, even as the bank considers cutting back stimulus in coming months.
Wall Street stocks jumped as much as 1 percent, before modestly paring gains after Bernanke, in testimony to Congress, said that if economic improvement continued, "We could in the next few meetings take a step down in our pace of purchases."
The dollar rose to a 4-1/2-year high against the yen after Bernanke cited the risks of holding interest rates too low for too long, reversing earlier losses sparked by his comments that it was too soon to remove existing stimulus measures.
U.S. Treasuries sold off on Bernanke's comments about possibly tapering bond purchases, with the yield on the 10-year note, which moves inversely to the price, briefly touching 2 percent, while European shares climbed into positive territory
"He said exactly what Wall Street wants to hear," said Todd Schoenberger, managing partner at LandColt Capital in New York. "He's putting out there that there's no end in sight, which is exactly what we want and why stocks are bidding higher.
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"With things continuing for quarters to come, summer doldrums seem unlikely this year," Schoenberger added.
In his testimony to Congress, Bernanke said the Fed's monetary policy was still providing significant benefits to the economy and that prematurely tightening it would carry substantial risks.
Analysts had not expected Bernanke to announce any substantial change to policy, but his comment on a potential tapering of the Fed's stimulus program caused stocks to come off their highs, which had seen the Dow and the S&P 500 touch new highs.
The Fed's policy is widely credited with contributing to the S&P 500's rally of nearly 18 percent in 2013, a surge that has repeatedly taken it to all-time highs, including on Wednesday.
Investors have been trying to determine whether the Fed is ready to begin paring back its $85 billion in monthly purchases of Treasuries and mortgage-backed securities, with expectations that it will start to gradually reduce the purchases later this year. But Bernanke's explicit mention, even with the caveats he mentioned, sparked the volatility in stocks, bonds and the euro.
The Dow Jones industrial average was up 118.78 points, or 0.77 percent, at 15,506.36. The Standard & Poor's 500 Index was up 12.80 points, or 0.77 percent, at 1,681.96. The Nasdaq Composite Index was up 20.29 points, or 0.58 percent, at 3,522.41.
The benchmark 10-year U.S. Treasury note was down 13/32, with the yield at 1.9753 percent, erasing early gains after Bernanke raised the possibility of reducing the Fed's bond purchases this year if economic growth improves further.
The MSCI all-country world equity index added 0.4 percent while shares in Europe rose 0.2 percent after earlier falling on weakness in luxury goods stocks.
The dollar index was up 0.4 percent against a basket of major currencies, near a three-year high of 84.37 struck last week. The euro fell 0.2 percent in a volatile session.
The dollar index is up nearly 5 percent this year as investors favor the greenback on signs of growing economic momentum and talk of an early end to the Fed's stimulus effort.
"The market's bias has been for dollar strength, but it is much more finely balanced now," said Elsa Lignos, senior currency strategist at RBC Capital Markets. "The reaction (to Bernanke) seems much more likely to be influenced by flows and technicals than the fundamental outlook."
The dollar hit a 4-1/2-year peak against the yen at 103.60 and a nine-month peak against the Swiss franc of 0.9812.
The dollar's moves were also seen limited by expectations that minutes from the Fed's last rate-setting meeting, to be released in the afternoon, will underscore the wide divergence between policymakers on the future of the bank's bond-buying program.
JAPAN RISES
Japan's Nikkei climbed 1.6 percent to a 5-1/2-year high after the Bank of Japan, as widely expected, maintained an aggressively loose policy that will inject up to $1.4 trillion into the financial system. The news kept the yen weaker against the dollar, which gained 0.4 percent to 102.85 yen.
MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.3 percent.
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COMMODITIES MIXED
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 percent after Bernanke's comments, while copper rose to its highest level in two weeks.
But oil dropped 0.8 percent on data showing a surprise jump in U.S. gasoline stocks, suggesting that summer U.S. demand might not meet supply. U.S. crude futures fell 1.2 percent.
(Editing by Dan Grebler and Leslie Adler)