By Dave Shellock

Investor risk appetite showed signs of fading yesterday as a rally in the dollar helped pull equity markets back from 2009 highs and undermined commodity prices. The dollar was back in focus as comments on Monday by Ben Bernanke, chairman of the Federal Reserve, provided a major talking point.

Bernanke reiterated the mantra that US interest rates would remain exceptionally low for an extended period but also broke with tradition by saying the central bank was attentive to the implications of changes in the value of the dollar. His remarks initially prompted only a brief rally in the dollar but currency market investors appeared to take a second look yesterday.

“Bernanke’s comments were peppered with a cautious tone, which was dollar unsupportive,” said Andrew Wilkinson at Interactive Brokers. “But once again, while the patient might not appreciate the taste of the medicine, the benefits will become clear over time. It’s that kind of subtle thought process that appears to be taking grip today as the dollar gains ground against the euro.” Indeed, the single currency at one stage looked as though it might slip below $1.48, after trading close to $1.50 on Monday. The dollar was also higher against the yen. Monetary policy expectations played a big part in currency moves elsewhere.

The Australian dollar fell 1.3 percent against its US counterpart after the minutes of the last meeting of the Reserve Bank of Australia prompted investors to scale back speculation of another interest rate rise next month. Sterling, meanwhile, touched a two-month high against the euro as robust UK inflation data prompted talk that the Bank of England may be nearing the end of its asset-purchase programme. Upbeat comments on the UK economy from Andrew Sentance, a noted hawk in the Bank’s monetary policy committee, further helped the pound.

UK government bonds outperformed after the Bank had to pay above-market rates to purchase ultra-long gilts. The yield on 10-year paper fell 8 basis points to 3.67 percent. Elsewhere, the 10-year German Bund yield fell 2bp to 3.28 percent and the 10-year Treasury yield slipped 2bp to 3.32 percent as buyers were encouraged by a broadly softer tone in equity markets.

In Tokyo, the Nikkei 225 Average fell 0.6 percent, while the Hang Seng index in Hong Kong eased 0.1 percent after failing to sustain an early break above 23,000. The pan-European FTSE Eurofirst 300 index fell 0.4 percent and the FTSE 100 in London shed 0.7 percent. By midday in New York, the S&P 500 was down 0.4 percent as gloomy comments from home improvement chain Home Depot offered a reminder of the fragile state of the housing market.

US industrial production figures provided similarly downbeat fare for the market. Overall production rose just 0.1 percent in October as motor vehicle production fell sharply. Dan Greenhaus, chief economic strategist at Miller Tabak, noted that as an October data point the figures related to output for fourth-quarter gross domestic product.

“The less than expected reading is therefore not the most encouraging way to start off the fourth quarter and should, along with [Monday’s] weaker Empire manufacturing survey, raise concerns as to whether or not there will be some moderation in manufacturing and output in the fourth quarter,” said Greenhaus.

US wholesale inflation figures, meanwhile, were “consistent with a picture of benign pipeline price pressures”, according to Alan Ruskin, chief international strategist at RBS. “The data will play to the idea that the Fed has a free hand on policy rates, without having to worry about inflation, provided, of course, that key interlinked variables like the dollar and oil behave themselves.”

In the commodities markets, oil held below $79 a barrel for most of yesterday as the dollar gained ground. Gold was also pushed back from Monday’s record high of $1,142.20 by the firmer tone of the US currency, while copper edged back after reaching a fresh 13-month high of $6,873.75 a tonne.