The Standard & Poor’s 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in to rescue Bear Stearns Cos, the fifth-largest US securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.

Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least one point that investors had expected.

Oil plunges

Gold had its biggest weekly loss since August 1990 after reaching a record $1,033.90 an ounce on March 17. Oil plunged almost $10 over three days, after rallying to $111.80 a barrel, the highest ever. Corn dropped more than nine per cent for the week, the most since July.

Until this week, commodities had outperformed stocks and bonds as the Fed reduced its benchmark rate five times since September, eroding the value of the dollar and fuelling concern that inflation would accelerate. This week’s rate cut brought the Fed’s target for overnight loans among banks down to 2.25 per cent. Because commodities such as oil and gold are priced in dollars, they have risen as the US currency has weakened in response to the Fed’s previous rate cuts. Oil, soybeans, platinum and wheat all jumped to records this year. Gold had rallied as much as 43 per cent since September 18, when the policy makers began lowering the federal-funds rate for the first time in four years.

Buying Euros

“The markets have been buying euros against the dollar, buying oil and buying gold as hedges,” said Andrew Busch, a global currency strategist at BMO Capital Markets in Chicago. “The Fed calmed the markets.” Bernanke is expanding the Fed’s monetary-policy toolkit as he seeks to keep strains in financial markets from spiralling into a full-blown meltdown. The world’s biggest banks and securities firms have reported $195 billion in asset writedowns and credit losses since 2007 stemming from the collapse of the US subprime mortgage market.

Expanded collateral

Fed officials on March 11 announced a programme to swap $200 b in Treasuries for debt including mortgage-backed securities. On Thursday, the Fed expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt & securities linked to commercial-property loans.

Earlier this month, the Fed increased the size of separate funding auctions to $100 billion in March from a previously announced $60 billion. The Fed on Thursday said it had lent $28.8 billion to large US securities firms under the programme announced on March 16, its first extension of credit to non-banks since the 1930s.