The Treasury's USD700 billion bailout plan was the market's main focus of the past week. The plan was announced over the weekend of Sep 20 and US lawmakers spent most of the past week discussing its details. The original plan proposed by Treasury Secretary Henry Paulson would give the US Treasury sweeping powers to buy troubled assets, including not only mortgage-related but also credit card and other debts, held by financial institutions operating in the US.

While the plan would have long term budget and debt ramifications, some believe that it would be positive for the dollar in the near term as it would help stabilize financial markets and improve chances for the recovery of the US economy.

The dollar fluctuated in volatile trading as investors weighed the long term negatives against the short term positives, while awaiting Congress' deliberations. Many were more willing to take on riskier assets when news emerged that some sort of tentative agreement was reached.

Our view is that even if the plan, in whatever form, is passed, it will not help save the US economy from recession. Banks may be more willing to extend credit after the bailout plan gets going, but the US housing market is unlikely to recover anytime soon due to the large inventory overhang. Labour market conditions will also deteriorate, making it more difficult for US consumers to sustain their spending habits. More government stimulus can be expected after a new administration takes office after the November election, the Fed too would be forced to cut rates again. However, other central banks would also need to act as financial institutions in their areas are also collapsing one after another.

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