During his semiannual testimony to Congress, Bernanke said that one kind of possible support would include a third round of Treasury bond buying. Such a program could keep interest rates from rising, supporting lending and economic activity.
But those low rates also make a currency less appealing to investors seeking big returns.
“The message from Bernanke today was clear — the Fed stands ready to respond with more stimulus if needed,” said Kathy Lien, research director for currency brokerage GFT.
The euro jumped to $1.4192 immediately after Bernanke began speaking from $1.4035 late Tuesday.
The euro has been pressured lately by fears of Europe’s debt crisis spreading to the larger economies of Italy and Spain. It had hit a four-month low below $1.40 earlier on Tuesday.
But in Wednesday’s trading, the increased chance of a third round of Fed stimulus, known as “quantitative easing,” outweighed the prospect of a potential banking crisis in Europe.
“No one expected Bernanke to mention more QE directly, which explains why the dollar fell aggressively after he said the Fed is prepared to respond with stimulus if needed,” Lien said.
“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony.
The Fed chairman said he still expects economic growth to pick up in the second half of the year, but is ready to act if the economy stagnates.
Bernanke also said, however, that it was possible that rising prices triggered by higher costs for energy and food may prove more persistent than the Fed had forecast. He said that the central bank would be prepared to start raising interest rates faster than currently expected by markets, which expect rates to remain very low until at least next year.
In other trading, the British pound rose to $1.6103 from $1.5939. The dollar dropped to 78.90 Japanese yen from 79.43 yen, but remained above a four-month low of 78.49 hit Tuesday.
The dollar also tumbled to 95.80 Canadian cents from 96.37 Canadian cents, and hit a record low against the Swiss franc at 0.8192 Swiss franc, down from 0.8299 Swiss franc.