* 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 [ID:nN08487125].
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)