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 Fed considers cutting back stimulus in coming months.
Wall Street stocks jumped as much as 1 percent before turning lower 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."
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.
"The market was disappointed with the fact that they did not get complete clarity and a green light that the current QE measures are going to be in place quarter after quarter," said Wilmer Stith, portfolio manager at Wilmington Trust Investment Advisors in Wilmington, Delaware. "The market was really hoping to get from Bernanke today certainty that tapering of quantitative easing is really not going to be in the picture in 2013."
That continued stimulus would be "data-dependent," added Stith, who helps oversee $25 billion in assets, "just leaves the market in this sort of unsettled environment."
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 early 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, crossing 2 percent, while European shares .FTEU3 ended 0.2 percent higher.
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 .DJI was up 27.74 points, or 0.18 percent, at 15,415.32. The Standard & Poor's 500 Index .SPX was down 1.15 points, or 0.07 percent, at 1,668.01. The Nasdaq Composite Index .IXIC was down 13.83 points, or 0.39 percent, at 3,488.30.
The benchmark 10-year U.S. Treasury note was down 25/32, the yield at 2.0174 percent, erasing early gains after Bernanke raised the possibility of reducing the Fed's bond purchases this year if economic growth improves further.
The dollar index .DXY was up 0.5 percent against a basket of major currencies, near a three-year high of 84.37 struck last week. The euro fell 0.3 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. <FED/DIARY>
Japan's Nikkei climbed 1.6 percent to a 5-1/2-year high .N225 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 .MIAPJ0000PUS eased 0.3 percent.
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.
Brent oil dropped 1 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 1.6 percent. <O/R>
Editing by Dan Grebler and Leslie Adler