U.S. stocks and dollar up on Fed rate hopes

By Herbert Lash

NEW YORK (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 after disappointing quarterly results from Goldman Sachs Group Inc 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, 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 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-month 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.