Oct. 24 (Bloomberg) -- Treasuries and the dollar fell as President George W. Bush nominated Ben Bernanke to replace Alan Greenspan to head the Federal Reserve, raising concern the central bank under new leadership may tolerate faster inflation to keep the economy growing. Stocks rose.

``There's more uncertainty with Bernanke than with Greenspan,'' said Bill Gross, who manages the world's largest bond fund as chief investment officer at Pacific Investment Management Co. Newport Beach, California. The sell off in bonds ``was not an expression of dissatisfaction with the choice but merely a reflection of the uncertainty.''

Some traders speculated that Bernanke may be more concerned about the pace of economic growth and so would be willing to permit faster inflation. The speculation hurt bonds as inflation erodes the value of bond interest payments, with the greatest impact on those maturing furthest in the future.

``We've gone from big Al to gentle Ben and the bond market may not like that,'' said Michael Strauss, who oversees $35 billion as chief economist and market strategist at Commonfund in Wilton, Connecticut. Bernanke was most vocal about ``the need for more aggressive interest rate easing'' when there was a threat of deflation and so the market sees the possibility fighting inflation is compromised by the need for growth, Strauss said.

The speculation also hurt the dollar, which has benefited this year from higher U.S. yields attracting international investors. Stocks rose on the prospects for faster economic growth.

Inflation Target

Fed policy makers have lifted their target interest rate 11 times since June 2004, to 3.75 percent from 1 percent.

The yield on the benchmark 10-year U.S. government note rose 6 basis points, or 0.06 percentage point, to 4.45 percent at 5 p.m. in New York, according to bond broker Cantor Fitzgerald LP. Yields move inversely to bond prices. The price of the 4 1/4 percent note due in August 2015 fell 1/2, or $5 per $1,000 face amount, to 98 7/16.

The dollar weakened to $1.1985 per euro from $1.1953 on Oct. 21, according to electronic foreign-exchange dealing system EBS. The Standard & Poor's 500 Index added 19.79, or 1.68 percent, to 1199.38.

Bernanke, a former Fed governor who is head of Bush's Council of Economic Advisers, has endorsed inflation targeting as a guide to setting central bank rates. Some investors view a target as a limit on the central bank's resolve to lift interest rates, said William Hornbarger, chief fixed-income strategist at A.G. Edwards Inc. in St. Louis.

``If you use core inflation right now as a target than it would argue the Fed is just about at neutral or might have even gone too far,'' said Hornbarger.

No `Inflation Dove'

Declines in bonds and the dollar were limited as traders said rate increases will likely continue. Bernanke said at a press conference today his first priority is to maintain continuity at the Fed.

``We do not see Bernanke as an inflation dove,'' economists led by John Ryding at Bear Stearns & Co. wrote in a research note. ``We expect the Fed will continue the gradual removal of accommodation and we continue to project that the funds rate will reach 5 percent by the middle of next year.''

Treasuries also fell on June 2, 1987, the day then- President Ronald Reagan nominated Greenspan to succeed Paul Volcker as Fed chief.

Ten-year note yields soared to 8.72 percent, from 8.45 percent the day before. By the end of the month, yields had slipped back to 8.38 percent. Benchmark 30-year yields climbed 27 basis points to 8.9 percent that day, before easing to 8.51 percent by the end of the month.

Past Reaction

``What the market always wants is predictability, even though we know that's impossible,'' said Susan Fulton, who manages $280 million at WealthTrust-FBB in Bethesda, Maryland.

The dollar fell 2.2 percent versus the yen on the day Greenspan was nominated. It recovered more than half of that loss during the following two days, according to Bloomberg data. Against the deutsche mark, the dollar lost 1.6 percent and half the loss was recouped the following two trading days.

Today's decline will be ``nowhere near'' the same magnitude, said Monica Fan, head of global currency strategy at RBC Capital Markets Ltd. in London. Speculators are using the appointment as an excuse to reduce bets on the dollar's advance, she said. If investors were really concerned about Bernanke's appointment, the dollar would weaken to $1.21 per euro, Fan said.

In a March 20 speech to the Virginia Association of Economists, Bernanke said the current account deficit ``will eventually begin to improve, although a return to approximate balance will take some time.''

Inflation Target

The yield on the 10-year note has fallen from 4.88 percent since the Fed started lifting rates. Merrill Lynch & Co.'s U.S. Treasury Master Index has returned 5.74 percent since mid-2004, including reinvested interest.

Today's gain in the S&P 500 was the most since April.

``He is certainly a less hawkish choice as the new Fed chairman,'' said Timothy Ghriskey, chief investment officer at Solaris Asset Management. ``That is positive news for stocks.''

Bernanke is an advocate of a strategy called inflation targeting where a central bank specifies a numerical goal for prices. The European Central Bank, which has kept interest rates unchanged while the Fed has increased borrowing costs, has an inflation target.

The Federal Open Market Committee debated the strategy as early as February, and decided to defer the discussion.

Anchoring inflation at a rate no higher than where it is currently is a primary goal of Fed policy makers, according to several recent speeches.

The consumer price index rose 1.2 percent in September, the biggest jump since 1980. Stripping out the storm-related effects of rising energy costs and food, the price benchmark rose 2 percent, at the upper limit of price increases for Fed officials who have specified one.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: October 24, 2005 17:15 EDT