Dollar gets Euro boost

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NEW YORK (CNNMoney) -- Bad news for Europe is translating into good news for the U.S. dollar, while the 10-year Treasury yield moved back below 2% following Fed chief Ben Bernanke's speech Thursday afternoon.

The dollar rallied against the euro after European Central Bank President Jean-Claude Trichet said economic growth in Europe could grind to a near standstill next year. That boosted the U.S. dollar 1.5% over the euro to $1.39.

"The market is clearly betting that the next move by the European Central Bank is lower not higher," says Jim Barnes, senior fixed income portfolio manager at National Penn Investors Trust Company.

Unlike the U.S. Federal Reserve, which has been keeping interest rates steadily low, the ECB increased its overnight rate in April and July pushing it up to 1.5%.

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Meanwhile, the U.S. bond market was volatile throughout the day as investors continue to place bets on what -- if anything -- the Federal Reserve will do to bolster the U.S. economy.

Bernanke's comments provided few clues about what the Fed might do at its upcoming two-day meeting starting Sept. 20.

"[Bernanke] really didn't say anything, so the market doesn't have anything new to trade on," said Barnes. "There's going to be more volatility until the Fed gives more clues on what it will do."

Bond investors are still gambling that the Federal Reserve might institute a new policy dubbed "Operation Twist." The Federal Reserve in this case could buy up long-term bonds in an attempt to push down long-term interest rates. In anticipation of Operation Twist, 10-year and 30-year Treasury prices have recently seen a pop.

Operation Twist should be neutral for the U.S. dollar "because driving long yields down and flattening the curve is much less dollar-negative than simply doing more QE." wrote Societe General analyst Sebastien Galy in a note to investors. "Bottom line, twist isn't bad for the dollar."

The price on the benchmark 10-year U.S. Treasury rose slightly, pushing the yield down to 1.98% late Thursday. Yields on 30-year bond dropped slightly to 3.3% as prices increased.

Still some analysts question whether any moves by the Fed can change the complexion of the US economy or the markets.

"Investors need to proceed with caution," says Joseph Tanious, vice president and market strategist at J.P. Morgan Asset Management. "The sovereign debt crisis and the pace of economic growth are driving most of the volatility in the market. With rates at all-time lows, I wonder how effective the Fed can be with anything they can do."