Ugly bailout fallout: Dollar plunges, oil and gold surge

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The world’s reaction today to Uncle Sam’s massive housing bailout plan: Sell America.

The dollar is plummeting, commodity prices are soaring, Treasury bond yields are up and the stock market is slumping.

This can’t be the reception Treasury Secretary Hank Paulson was counting on from foreign investors.

But is it them -- or is it us?

‘What people are focusing on is that this damages the fiscal position of the U.S. dramatically,’ said Kathy Lien, currency strategist at GFT Forex in New York. ‘It’s making foreigners less interested in U.S. assets.’

The $700-billion bailout plan will mean a huge amount of new borrowing by Uncle Sam, on top of the borrowing binge already underway to help support the financial system (such as to fund purchases of Fannie Mae and Freddie Mac mortgage securities).

Countries judged to be fiscally challenged typically don’t have strong currencies. So the dollar is taking a big hit.

The euro was at $1.48 just before noon PDT, up from $1.446 on Friday and the highest in six weeks. The DXY index, which measures the dollar against six major foreign currencies, has fallen 1.8% to 76.31, the biggest one-day drop in at least a year.

The crumbling dollar is helping to fuel a major rush back into commodities. At the close of floor trading on the New York Mercantile Exchange today, near-term crude futures were up $18.05, or 17%, to $122.60 a barrel, the highest price since Aug. 1.

Oil’s huge gain was skewed by ‘short covering’ related to the near-term futures contract’s expiration. Still, every one of the 19 commodities in the Reuters/Jefferies CRB index is higher today. The index itself is up 3.3%.

And gold is going vertical again, resuming the climb that began last Wednesday. Near-term gold futures are up $45.10 to $909.80 an ounce, the highest since Aug. 1.

‘At times like this, people just like to flock to tangible assets,’ said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago.

But will it last? Traders clearly are bearish on the dollar and U.S. assets in general right now, and they’re creating the kind of situation they love: a big shift in momentum that pulls in more buyers (in the case of commodities) and sellers (in the case of the dollar).

Longer-term, if the bailout plan fails, and the U.S. plunges into a deep recession, that may be more bearish for the dollar -- but it’s hard to imagine it being bullish for commodity demand.

In a hot market, nobody thinks that far ahead.