US President George W. Bush named Bernanke Fed chairman to succeed Alan Greenspan, who will retire on January 31 after 18 years at the helm of the US central bank.
The euro slightly pared its gains against the dollar, trading at $1.1984, up 0.3 percent from late Friday. The dollar also came off lows against the yen, trading at 115.42 yen, down 0.4 percent.
Market talk that Bernanke would get the nod to head the Fed modestly weakened the dollar early in the New York session on concern over his likely policy approach.
"The main thing here is that you're not going to see a difference. Maybe that was the comfort that the foreign exchange market is looking for," said TJ Marta, senior currency strategist at RBC Capital Markets in New York.
"There would be a continuity of policy and the policy right now is slow, steady tightening," he added. Higher US interest rates have boosted the greenback for much of 2005 as they have enhanced the attractiveness of some dollar-denominated assets.
The dollar gained a few points against the Swiss franc shortly after the announcement, although it was still trading 0.4 percent lower at 1.2869 francs. Sterling was flat at $1.7686.
Bernanke's Fed experience and academic background also impressed the markets. He is currently chairman of Bush's Council of Economic Advisers and served on the Fed's Board of Governors from 2002-2005 before moving to the White House in June.
"He carries a lot of credibility in the marketplace. He's well respected in terms of his knowledge and his experience at the Fed. He is seen as very capable and credible that would prove reassuring in the near term," said Alex Beuzelin, senior market analyst, at Ruesch International in Washington, DC.
Earlier, the dollar weakened slightly as market rumours spread that Bernanke would be named Fed chief. Analysts said markets were concerned about Bernanke's inflation-targeting approach.
Inflation targeting involves adjusting monetary policies to reach desired inflation levels, a practice Greenspan opposes.
"The problem with inflation targeting is that it carries with it a risk of less flexibility at times, and that could be problematical. But it also makes policy less of a black box, so policy is likely to be more transparent," said Alan Ruskin, director of research at 4Cast in New York. "Bernanke has a reputation for being an open individual, so there probably will be more communication in general. That is probably a good thing for the most part," he added.
The White House economic adviser has also been widely credited with shaping the policy debate on deflation and helping spur the decision of lowering interest rates to 45-year lows of 1 percent.
But despite all his qualifications and widespread support both in the United States and abroad, analysts say Bernanke faces not a few challenges ahead.