* Dollar rallies after Bernanke comments
* Bernanke says may keep Fed's emergency lending open
* U.S. pending home sales index drops in May
(Updates prices, adds comments)
By Gertrude Chavez-Dreyfuss
NEW YORK, July 8 (Reuters) - The dollar rebounded broadly
on Tuesday, lifted by comments from Federal Reserve Chairman
Ben Bernanke, who said the central bank is willing to keep its
emergency lending facility open beyond the end of the year for
big Wall Street firms.
The Fed chief's remarks eased renewed credit worries after
a Lehman Brothers report on Monday said a pending accounting
change could force Fannie Mae <FNM.N> and Freddie Mac <FRE.N>
to raise a combined $75 billion in capital.
Fannie and Freddie's regulator, the Office of Federal
Housing Enterprise Oversight, also sought to appease those
concerns, saying on Tuesday that a proposed accounting change
should not spur capital changes at the two government-sponsored
agencies.
"The FX market in general is heartened by Bernanke's
extension of liquidity," said Win Thin, senior currency
strategist, at bank Brown Brothers Harriman in New York.
"It shows that the Fed continues to remain flexible" in its
efforts to unfreeze credit and instill calm in financial
markets," he added.
Bernanke said the Fed was considering several options,
including extending the duration of the central bank's
facilities for primary dealers beyond the end of the year
should the current unusual circumstances persist in the dealer
funding markets. For details, see [].
By midday trading, the dollar had risen to 107.38 yen
<JPY=>, up 0.2 percent on the day, recovering from session lows
at 106.26. The euro lost half a percent against the dollar to
$1.5641 <EUR=>.
Against the Swiss franc, the dollar gained 0.7 percent to
1.0333 francs <CHF=>, while sterling slid 0.4 percent to
$1.9681 <GBP=>.
RATE OUTLOOK, OIL PRICE DROP
Some analysts believe that if the Fed actually extends the
duration of its lending facility, then the U.S. central bank
may not have to raise interest rates this year.
Still others, like Thin of Brown Brothers, think liquidity
problems and inflation concerns are two separate issues.
believes that the Fed is still on track to raise rates in
September.
Nevertheless, federal fund futures are currently pricing in
a 45 percent chance that interest rates will rise in September,
down from 65 percent a week ago, according to DailyFX.com. As
for the October meeting, there is a 53 percent chance that U.S.
rates will increase, while prospects are about the same for the
December meeting.
Data on Tuesday showing a steep drop in the U.S. pending
home sales index for May had only a brief but negative impact
on the dollar, suggesting that the housing market is still far
from recovery.
The continued drop in oil prices to below $137 per barrel
from a lifetime peak of $145.85 also added to the dollar's
positive tone.
Hurricane Bertha became a "major" hurricane on Monday, but
none of the computer models used to predict storm tracks
indicated it would steer toward the Gulf of Mexico, the focus
of the U.S. oil and gas industry.
Market players, meanwhile, were still watching the annual
summit of the Group of Eight industrialized nations in Japan
for any comments on the dollar's weakness.
German Chancellor Angela Merkel pressed other leaders for
a reference to exchange rates in the economic communique, a G8
diplomat told Reuters, while U.S. President George W. Bush
reaffirmed at the summit that he supported a strong dollar.
The meeting concludes on Wednesday.
(Editing by Jonathan Oatis)
