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Sen. Christopher Dodd, chairman of the U.S. Senate Banking Committee, on Tuesday said Federal Reserve Chairman Ben Bernanke had told him the central bank will use all available tools necessary to quell recent volatility in financial markets arising from fears of a credit and liquidity freeze.

Investors interpreted that as a sign that, while there may be no imminent cut in benchmark interest rates, the Fed would lower its key federal funds rate from 5.25 percent if need be.

This boosted stocks, weighed on top-rated government bonds, depressed currency market volatility and tempted traders back into the carry trade -- selling the low-yielding yen for assets in higher-yielding currencies.

There's some short-term normalcy in the market, with macro guys putting on carry trades, although they could be covering shorts, said Matt Kassel, director of foreign exchange at ING Capital Markets in New York.

The market has basically priced in a 50-basis-point rate cut. If that doesn't happen you're going to see some funding problems resurface, he added.

In early New York trading, the dollar was up 0.7 percent on the day at 115.16 yen, continuing to rebound from the 14-month low of around 111.60 yen last week.

The euro rose 0.8 percent against the yen to 155.29 yen and was up 0.1 percent against the dollar at $1.3476.

The Australian dollar was up 1.4 percent against the yen at 92.83 yen and the New Zealand dollar rose 1.3 percent to 80.59 yen.

Still, confidence in global credit markets has by no means been fully restored and fears persist that short-term liquidity will remain tight.

Markets are fairly quiet at the moment but there is a sense of anticipation; it may be that we are in the eye of the storm rather than the storm having passed, said Laura Ambroseno, currency strategist at Morgan Stanley in London.

In Japan, widespread expectations its central bank will keep interest rates on hold at 0.5 percent on Thursday also weighed on the yen, analysts said.

A month ago most market participants expected a 25 basis point rate hike at the end of this Bank of Japan meeting.

We think the BoJ will hold rates steady this month to allow time for current problems to play themselves out. How long this will take is the million-dollar question, said Bear Stearns in its latest research note.

Analysts said the nervousness in financial markets is likely to persist for some time, particularly with investors wary of taking on risk as conditions in the commercial paper markets, a critical source of short-term funding, remain tight given persistent turmoil in the U.S. subprime mortgage sector.

Yields on three-month U.S. Treasury bills, a reflection of investors' demand for safety, rebounded on Wednesday to 3.75 percent from a low of 2.9 percent on Tuesday.

U.S. rates futures are still reflecting perceived chances of almost 75 basis points of easing this year.

(Additional reporting by Jamie McGeever in London)

Baar-based Glencore, the world's largest commodity trader, says it may buy more Katanga Mining shares in open market trading or through private transactions. Through its Bermuda-registered unit, Glencore Finance Ltd., it currently holds 12.4% of Katanga Mining.

Glencore had previously disclosed it had no plans to acquire any additional stake in Katanga Mining but it has reviewed its investment alternatives and has determined that it may increase its equity ownership in Katanga, the company announced in a statement posted on its website over the weekend.

Katanga operates a mining complex in the DRC's Katanga province, whose key assets include the Kamoto Underground Mine and KOV open pit mine, providing sulphide and oxide ores respectively; and the Kamoto Concentrator, Luilu Metallurgical Plant and a planned SX/EW refinery for the onsite production of refined copper and cobalt. It also owns a number of other mines and plants.

Glencore however did not say by how much it would seek to increase its stake. But it has always been stepping in whenever things go wrong in the Canadian company. On Thursday last week, Katanga reported a net loss for the first quarter to 31 March of US$17.4-million or US$0.10 per share, compared to a net loss for the first quarter of 2007 of US$5.4-million or US$0.07 per share.

The net loss, which is more than triple year-on-year losses, pushed down the value of its shares by C$0.90 to C$10.43 in Toronto. But following the announcement by Glencore, its shares opened Monday up C$2.24, or 20%, to C$13.46, the biggest gain since November 6, 2007, when it announced its agreement to buy fellow Katanga miner, AIM-listed Nikanor PLC.

Last October, Glencore also came to the rescue of Katanga after an attempted takeover of the company by Central African Mining & Exploration Company fell through, pumping in US$150-million through a one-year loan facility.

The loan was believed to be the biggest ever provided by Glencore to a junior mining company and reportedly set a precedent for the group's operations as a lender to such companies. It however secured the Swiss-based company a healthy supply of copper and cobalt through an attractive 10-year offtake arrangement.

Katanga is, meanwhile, working towards becoming profitable by the end of the year. It has completed the take-over of Nikanor following the tendering of over 90% of the outstanding Nikanor shares to the offer, which was declared unconditional on January 11. The acquisition resulted in the creation of what will be one of the world's largest cobalt and copper producers.

The company produced its first copper cathode in December last year and posted a first quarter production of slightly less than 4,000 tons. It began producing cobalt on May 3, with full-year production forecast at 1,600 tons.

Katanga, headquartered in Toronto, plans to boost annual copper production at its mine to 30,000 tons of copper by 2011 from the 3,946 tons this year to benefit from prices that have more than doubled in London in the past three years.

Concentrate production of 43,500 tons for the year is expected to add 3,000 tons of payable copper and 1,300 tonnes of payable cobalt, Chairperson, president and CEO Arthur Ditto said in a statement accompanying the company's financial statement.

Copper cathode production increased each month during the first quarter and we were pleased to see cobalt metal production at the start of May. On-site performance is improving, with mine output steadily increasing and Luilu production growing. As a consequence, we expect to be profitable this year, he said.

Phase II of the Kamoto rehabilitation is expected to be complete by the end of 2008 at a capital cost of US$136-million. At the Luilu Metallurgical Plant, a new roaster is being constructed, while leaching capacity and copper and cobalt electrowinning capacity will be doubled. Capacity is expected to increase to about 100,000 tons per year of copper cathode.

We are working hard to complete the feasibility study for the expansion project by the end of the third quarter, alongside preparation for mining of the KOV pit and commencing civil work for the new SX/EW plant, said Ditto.

U.S. stocks fell sharply after a report showed that phone company AT&T saw softness in its consumer business, boosting the expectation that the Fed would cut its benchmark target interest rate by 50 basis points to 3.75% at the Jan. 30 meeting. The Standard & Poor's 500 Index fell 1.8% after earlier gaining as much as 1%. Dow Jones index tumbled by 238 points.

Interest-rate futures showed 74% chance that the Fed will cut interest rate by 50 basis point on Jan. 30, up from 68% on Monday and zero percent a week ago. The chances for a quarter-point reduction are 26%, down from 92% a week ago.

The minutes of the Fed Board's discount rate meetings showed the Boston, Minneapolis and San Francisco Fed bank directors voted to request a 50 basis-point cut in the discount rate ahead of December's Fed policy meeting as some directors viewed a deeper cut necessary to ward off a more serious economic downturn.

Boston Fed President Eric Rosengren said the decline in U.S. house prices may worsen this year and heighten the risk of a ‘more significant downturn’ in the economy. Philadelphia Fed President Charles Plosser said further interest-rate cuts may be needed should the outlook for U.S. economic growth become ‘substantially weaker’ than already projected.

On the data front, U.S. pending home sales decreased 2.6% in November, following a upwardly revised 3.7% gain during October. The U.S. currency fell initially against euro, aussie and Swiss franc as U.S. pending home sales declined more than forecast in November. Australian dollar and New Zealand dollar rose against U.S. currency to 0.8840 and 0.7733 before retreating later in the day on active cross buying in jpy.

The greenback retreated versus Swiss franc from 1.1192 to 1.1119. The British pound rebounded briefly from 1.9666 to 1.9830 and then weakened again to close at 1.9735 on renewed cross selling in sterling.

Wednesday will see the release of U.K. Nationwide consumer confidence, German retail sales, trade balance and current account, eurozone GDP, German industrial production and U.S. leading indicators.

Pries at consumer level have increased 0.5% on the month and 1.8% on the year, slightly faster year on year growth than the 1.5% expected.

The reasons for such high CPI has been the increase on the categories housing, energy and transport, which posted a 1.2% rise each, the 11.6% increase on heating oil and the 4.2% rise of fuel prices.

It restores confidence, but we're not out of the woods yet, said Bill Hoskins, managing director of fixed-income research at Mellon Capital Management, in San Franscisco.

In a surprise before the market's open on Friday, the Fed cut the discount rate on its loans to banks to 5.75 percent from 6.25 percent. The fed funds rate on interbank loans was left at 5.25 percent.

Hoskins said the Fed has created a safety net that makes it possible for banks to lend to credit-worthy borrowers. But he also said financial institutions remain leery about lending to one another after the blowup in subprime mortgages.

Subprime loans are the lowest tier of the mortgage market where borrowers received loans despite poor credit histories.

If investors are looking past faltering credit markets for cues on what to do next, the week offers only a few pieces of economic data and a very thin calendar of corporate earnings.

Stocks, which erased nearly all of a 300-point decline in the Dow industrials in the final hour of Thursday's trading, rocketed higher on Friday after the Fed's move.

But the rally on Friday was not enough to prevent the major indexes from finishing with losses for the week.

The Dow Jones industrial average ended the week down 1.2 percent, the Standard & Poor's 500 index fell 0.5 percent and the Nasdaq composite index declined 1.6 percent.

For the year, though, all three U.S. stock indexes are still higher. The Dow is up 4.9 percent, the S&P is up almost 2 percent and the Nasdaq is up 3.7 percent. Friday's surge helped the S&P recover from the previous two days, when the broad index had given up all its gains for the year.

Investors will obviously start the new week hoping that Friday's rebound will hold.

STOCKS MAY KEEP CLIMBING

I'm expecting some follow-through on the upside, said Ralph Acampora, chart analyst and director of research at Knight Capital Group in Jersey City, New Jersey.

Acampora noted that the decline reached the point of a 10 percent pullback from all-time highs in the major indexes, in technical parlance a correction that washes out excesses. Secondary indexes had an even steeper pullback.

I'm not looking for it to be huge by any means, but I think we'll get a little more out of it, Acampora said of the continued rally that he expects. But he warned that the subprime problems have tentacles that extend very far.

Countrywide Financial Corp. shares soared on Friday after six days of declines that brought the stock to its lowest point in nearly four years. Countrywide is the largest U.S. mortgage lender.

Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois, said volatile days lie ahead.

I think there will be more of the same in terms of volatility, Cherukuri said. People are still trying to figure out what companies are exposed, and to what degree, in terms of financial companies. I think that's the big focus,

NEW HOME SALES UNDER THE MICROSCOPE

One key piece of data does not come until Friday, when the Commerce Department reports on new home sales for July.

Sales last month likely remained in a slump at an annual rate of 820,000 homes, down from 834,000 in June, according to the median forecast in a Reuters poll of economists.

On the same day, the markets get a report on durable goods orders for July. Economists expect a 1.0 percent increase following a 1.3 percent rise in June.

The week's data includes the Conference Board Index of Leading Economic Indicators, which is expected to rise 0.4 percent after a decline of 0.3 percent in June. That report comes on Monday.

The week's list of companies reporting corporate earnings is also short, with retailers in the majority.

Home improvement chain Lowe's Cos. Inc. releases results on Monday. Analysts expect a small increase from a year ago. The report will get special attention because of the company's involvement in housing, and also because rival Home Depot Inc. recently reported a 15 percent drop in profit.

Discount chain Target Corp. reports on Tuesday. Rival Wal-Mart Stores Inc. recently posted earnings that were higher than a year ago but beneath Wall Street's estimates.

Other retailers reporting earnings are Abercrombie & Fitch Co., Limited Brands Inc., Gap Inc. and Staples Inc.

Outside of the retailing arena, reports are due from medical device maker Medtronic Inc. on Tuesday and food company H.J. Heinz Co. on Friday. Heinz said on August 15 that its profit would exceed Wall Street's forecasts.

(Additional reporting by Caroline Valetkevitch and Ellis Mnyandu)