Dollar sinks, Treasury bond yields fall, gold zooms -- but can these dots be connected?

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Fear made a return appearance in key financial markets on Tuesday, pummeling the dollar, triggering another wave of buying in the Treasury bond market and driving gold to a new high.

But fear of what, exactly, was an open question. The big worry of August -- that the economy was heading back into recession -- has been losing credibility this month.

Indeed, the government on Tuesday said retail sales rose 0.4% in August, the biggest gain since March and a sign that consumers haven’t gone into hiding. The stock market closed mixed after an early rally, with the Dow industrials slipping 17.64 points, or 0.2%, to 10,526.49 after four straight gains. The Dow is up 5.4% since Aug. 26 as economic jitters have receded.

But the retail report was no help to the dollar, which tumbled against its major rivals, including the euro and the yen, for a second day. The euro jumped to a five-week high of nearly $1.30 from $1.287 on Monday and $1.268 on Friday. The dollar hit a fresh 15-year low against the yen, at 83.04 yen, down from 83.71 on Monday.

A falling dollar can be a sign that investors are losing faith in the U.S. economy. But in this case, many analysts say the fear driving people out of the greenback is that the Federal Reserve is poised to push interest rates even lower. Falling interest rates can weaken a currency by encouraging investors to look to other countries for higher yields.

Goldman, Sachs & Co. Chief Economist Jan Hatzius on Tuesday reiterated that he expects the Fed in the next few months to announce a major expansion of its program of buying Treasury bonds for its own account. The Fed may ramp up its purchases by as much as $1 trillion, Hatzius said.

That idea of a massive new “quantitative easing� effort, on top of the Treasury purchases the Fed announced last month, naturally thrills the bond market because of the prospect of another big drop in yields. The 10-year Treasury note yield slid to 2.68% on Tuesday from 2.74% on Monday, continuing to descend after hitting a five-week high of 2.79% on Friday.

William O’Donnell, government bond strategist at RBS Securities in Stamford, Conn., said the Treasury market is sensing, or praying, that the Fed will boost its bond purchases even if the economy just muddles along, as opposed to weakening significantly.

“A growing number of people think that even if the economy just goes sideways the Fed will have to act,� he said.

Some investors and traders who didn’t want low-yielding Treasuries as a haven against economic uncertainty opted for something tangible Tuesday: gold and other commodities.

September gold futures in New York surged $24.60 to a record $1,269.70 an ounce. The metal now is up 16% this year. Silver and platinum also rallied.

Commodities are the natural hard-asset alternatives to paper currencies, so the dollar’s renewed slide underpinned demand for metals. And by now gold’s reputation as a refuge is well-known everywhere on the planet: The price has risen every calendar year since 2000, when it stood at $274 an ounce.

Larry Young, president of Covenant Trading in Chicago, said gold benefited from a huge wave of momentum buying after the price topped $1,260 at midday Tuesday. “At that level you saw money following money� into the metal, he said.

Professional traders, Young said, are hoping to see small investors pulled into gold at these prices. “I think Mom and Pop will see the headlines of ‘gold at new highs’ and will want to buy in,� he said. But he advised caution in the short term, saying the metal is vulnerable to profit-taking by market pros as the end of the third quarter nears.

Gold’s detractors say it’s a bubble, but that hasn’t deterred buyers who just want a place to hide. As Peter Hillyard, director of commodities sales at ANZ Banking Group in London, told Reuters: ‘Investors, whether rightly or wrongly, believe in this.’

And not in much else these days.

-- Tom Petruno