The dollar rose against the yen Wednesday, following U.S. stocks higher, as investors bet that the worst of the credit crisis may be over and grew more tolerant of risk.
Battered bank stocks have been better perceived in the last two days after Lehman Brothers Holdings raised $4 billion of capital on Tuesday, quelling some speculation that the investment bank may be in trouble.
That followed news that UBS and Deutsche Bank were together taking a $23 billion hit on risky assets, but some investors took this as a sign the worst is over for the banking giants.
Although congressional testimony by Federal Reserve Chairman Ben Bernanke caused some volatility initially, his comments were largely taken as positive. While the U.S. economy could face a mild recession in the first half of 2008, Bernanke said growth should pick up as the impact of aggressive interest rate cuts are felt.
"Risk plays are being put back on," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "A little bit of fear has gone out of the market on things that happened yesterday."
Midway through the New York session, the U.S. currency was up versus the yen , close to the day's high of 102.78 yen.
The euro gained against the dollar, but remained well off last month's record high around $1.5905, according to electronic trading platform EBS.
Bernanke's comments also raised expectations the benchmark U.S. interest rate may not have much more room to fall.
Short-dated U.S. Treasury bond prices extended losses on Wednesday, pushing up their yields and flattening the yield curve after Bernanke's comments hinted that an end to the rate cutting cycle was drawing near, traders said.