Stocks, oil, euro after Bernanke economy view

World stocks and oil prices rose in choppy trade on Tuesday after a gloomy economic outlook by Federal Reserve Chairman Ben Bernanke kept alive views that the US central bank may take further steps to stimulate growth.

Shares and oil had come under pressure earlier in the session, while the US dollar rallied after Bernanke dampened hopes the Fed was moving closer to a third round of bond buying to bolster flagging growth.

But markets reversed course as reactions to Bernanke's testimony before Congress changed. Analysts said the Fed chief's comments on the economy, especially on the jobs market, suggested the central bank was leaving the door open for further monetary stimulus.

Bernanke said policymakers would consider a range of tools to further stimulate growth if it became clear the labor market was not improving or if deflation risks mounted.

"We do expect the Fed to launch QE3 possibly by as early as August," said Oliver Pursche, president at Gary Goldberg Financial Services in Suffern, New York. "The only game in town to revive or raise GDP growth is the Fed."

US stocks closed higher. The Dow Jones industrial average finished up 78.33 points, or 0.62%, at 12,805.54. The S&P 500 Index ended up 10.03 points, or 0.74%, at 1,363.67. The Nasdaq Composite Index closed up 13.10 points, or 0.45%, at 2,910.04.

Coca-Cola and Goldman Sachs joined the growing roster of S&P companies that beat profit forecasts and helped boost equities.

Bernanke also told the Senate Banking Committee the US economic recovery was being held back by anxiety over Europe's debt crisis and the path of U.S. fiscal policy.

"If the economy is weakening it means (Bernanke) will probably come back to the table. He hasn't spent that bullet yet and until he does, the markets are probably going to hold up," said Bruce Bittles, chief investment strategist at Robert W Baird & Co in Nashville.

"From a technical side we see improvement in the trend in the market, but the leadership remains with defensive sectors, which tells us there's not a lot of appetite for risk."

A measure of world stock markets was up 0.5% at 311.06 points after hitting a one-week high. European shares dropped 0.2% to close at 1,041.53.

DOLLAR SLIPS

The euro recovered from losses against the dollar in late trade as investors positioned for the next round of testimony from Bernanke. He will address the House of Representatives Financial Services Committee on Wednesday, in the second day of his semiannual testimony to Congress.

The euro rose 0.2% at USD 1.2295. It had earlier hit a one-week high of USD 1.2315 shortly after the release of the German ZEW survey, which was not as weak as some had feared.

Spain sold 3.56 billion euros of short-term debt, just above its target range, and debt costs dipped from a month ago, although they remained at high levels as investors speculated Madrid will ultimately need a sovereign bailout.

Spain faces a tougher test on Thursday when it auctions up to 3 billion euros of medium- and longer-dated bonds, with its 10-year bond yields edging close to the 7% level widely seen as unsustainable for a country's finances.

The dollar index, which tracks the greenback versus a basket of six currencies, slipped 0.1% to 82.993, off a session peak of 83.555.

The dollar gained 0.3% against the ye, to 79.10 yen, a day after dropping to a one-month low, after Japan's finance minister said the yen's rise does not reflect Japan's fundamentals and hinted that the government is prepared to intervene to stem excessive moves.

In commodities trading, Brent crude oil futures rose 63 cents per barrel to settle at USD 104.00 for a fourth straight day of gains. US crude ended up 79 cents at USD 89.22.

Spot gold fell to around USD 1,585 an ounce.

US government debt prices fell. Benchmark 10-year treasury notes were down 11/32, yielding 1.5061%.