* Wall Street turns higher on hopes of Fed rate cut
* Dollar gains as investors seek U.S. currency's safety
* Government debt rises amid widespread safe-haven bids
* Oil drops 4 pct in steepest two-day slide since 2004
(Updates market prices, quotes)
By Herbert Lash
NEW YORK, Sept 16 (Reuters) - U.S. stocks and the dollar
turned higher on Tuesday as investors bet the Federal Reserve
will cut interest rates to calm worries related to insurer AIG,
the latest company to be squeezed by a global credit crisis.
Wall Street fell prey to speculation about a possible
rescue of American International Group Inc <AIG.N> after
disappointing quarterly results from Goldman Sachs Group Inc
<GS.N> failed to lift the deep gloom over financial markets.
Talk of a possible U.S. interest rate cut later in the day
kept investors on edge a day after the U.S. government failed
to provide a lifeline to Lehman Brothers <LEH.N>, forcing an
icon of Wall Street to file for bankruptcy protection.
Central banks flooded money markets with cash to encourage
bank lending amid widespread credit concerns, while government
debt prices jumped on heightened fears about global finances.
Yields on the 30-year U.S. Treasury bonds fell below 4
percent for the first time since the early 1960s.
Bund futures <FGBLc1> rallied more than a full point to as
high as 116.13, its strongest level since mid-April.
Oil fell more than 4 percent to a seven-monthh low on
rising concern that market turmoil will further undermine
demand and send investors into safer havens. Reports that U.S.
oil infrastructure had escaped major damage from Hurricane Ike
helped push crude prices down.
U.S. stocks briefly turned positive and European shares
pared losses after CNBC television, citing sources familiar
with the matter, said a government role in an AIG bailout was
being discussed but that no resolution had been reached.
Sentiment brightened on hopes the Fed would cut interest
rates to calm turbulent financial markets. Fed policy-makers
were set to make an announcement at the end of a scheduled
meeting at 2:15 p.m. (1815 GMT).
"I don't think an interest rate cut is really necessary,
but what they say is damn important," said Hugh Johnson, chief
investment officer at Johnson Illington Advisors in Albany, New
York. "What's important is some statement to the effect that
the Federal Reserve stands prepared to exercise its
lender-of-last-resort function to bring stability to the
financial markets."
Shortly before 1 p.m., the Dow Jones industrial average
<> was up 23.53 points, or 0.22 percent, at 10,941.04. The
Standard & Poor's 500 Index <.SPX> was up 1.66 points, or 0.14
percent, at 1,194.36. The Nasdaq Composite Index <> was up
1.76 points, or 0.08 percent, at 2,181.67.
Shares of AIG were down 35 percent at $3.09, having been
down as much as 68 percent earlier, following a slide of more
than 60 percent on Monday.
European shares fell to their lowest close since May 2005
as investors grew more jittery about AIG's fate and commodity
stocks tracked sharply lower metal and oil prices.
The FTSEurofirst 300 <> index of top European
companies closed 2.5 percent lower at 1,091.50 points, after a
3.6 percent tumble on Monday. It is down about 28 percent so
far this year.
"Europe is just a residual on what is going on in the U.S.
All eyes are on AIG and whether they can drum up the money
tonight to keep them from going bankrupt," said Philip Lawlor,
chief portfolio strategist at Nomura.
In Europe, banks were the top negative weight on the index,
with top British mortgage lender HBOS <HBOS.L> down almost 22
percent and Royal Bank of Scotland <RBS.L> down around 10
percent.
Tame readings on U.S. consumer prices in September and
tumbling oil prices helped assuage inflation worries and
reinforced the view that Fed policy-makers will turn their
focus to the market turmoil.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
5/32 to yield 3.39 percent. The 30-year U.S. Treasury bond
<US30YT=RR> rose 12/32 to yield 4.02 percent.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.68 percent at 79.017. Against the yen,
the dollar <JPY=> was down 0.41 percent at 104.96.
Analysts said that despite much of the bad news originating
in the United States, the dollar benefited from the widespread
financial jitters as investors, particularly those from the
United States, became increasingly keen to send money back home
for safety.
"I expect the dollar's upswing to continue. The major
driver behind this is a massive repatriation of foreign-based
U.S. investments including those from foreign funds," said Adam
Fazio, a senior currency strategist, at CIBC World Markets in
New York.
The euro <EUR=> was down 0.81 percent at $1.4149.
U.S. light sweet crude oil <CLc1> fell 5.1 percent to
$90.82 a barrel.
Gold earlier fell nearly 2 percent alongside a sharp drop
in oil, turned higher, then fell again. Spot gold prices <XAU=>
fell $9.20 to $777.00 an ounce.
Gold normally gains on safe-haven buying during financial
crises, but portfolio managers have been selling assets across
the board after Leman's bankruptcy filing.
Platinum slipped more than 9 percent to its lowest level
since October 2006 as a weakening global economy hit demand
from auto makers. Platinum has lost half its value in the last
six months from a record high of $2,290 an ounce in March.
Russia's stock exchange suspended trade for one hour, with
the MICEX index off 16.6 percent in the sharpest one-day
percentage drop since the 1998 financial crisis, Reuters data
showed. Liquidity fears drove the plunge, an exchange official
said.
Asian shares plunged overnight, hit by a wave of selling in
the financial sector. Tokyo's Nikkei share average slumped 4.95
percent to its lowest level in three years. Japan's top three
lenders plunged, with No. 2 Mizuho Financial Group <8411.T> and
No. 3 Sumitomo Mitsui Financial Group <8316.T> losing about 10
percent, their worst daily percentage drops in nearly five
years. the Japanese market had been closed on Monday for a
holiday.
MSCI's index of Asia-Pacific stocks outside Japan fell 4.8
percent to the lowest level since August 2006. It is now down
44 percent from a peak last October.
(Reporting by Steven C. Johnson, Ellis Mnyandu and Richard
Leong in New York and Matthew Robinson and Agnieszka Flak in
London; Writing by Herbert Lash; Editing by Leslie Adler)
