Traders began betting the Federal Reserve will cut its target for overnight loans by 1 percentage point tomorrow to keep losses in credit markets from pushing the U.S. economy into a recession, futures contracts on the Chicago Board of Trade show. The Fed trimmed its discount rate by a quarter-point before Asian stock markets opened, failing to halt a slump in regional equities.

“There’s a possibility of a 1-point rate cut” tomorrow, said Hiromasa Nakamura, one of the investors for the equivalent of $30.9 billion at Mizuho Asset Management Co. in Tokyo. “The economic situation is very serious. There’s a flight to quality in Treasuries.”

The yield on the two-year note fell 18 basis points as of 10:52 a.m. in Tokyo, according to bond broker Cantor Fitzgerald LP. The decline brought it to the lowest level since 2003. The price of the 2 percent security maturing February 2010 rose 11/32, or $3.44 per $1,000 face value, to 101 11/32. A basis point is 0.01 percentage point.

The two-year yield will fall to 1.2 percent by the end of March, said Nakamura, who correctly forecast last year’s rally in Treasuries.

Futures contracts show there is a 52 percent chance the central bank will lower the 3 percent target to 2 percent tomorrow. The odds of a move that large were zero last week.

The yield difference, or spread, between two- and 10-year yields widened by 6 basis points to 2.05 percentage points, approaching the most since 2004. The increase reflects greater demand for shorter maturities, which are more sensitive to changes in interest rates.

“Wow,” said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., the world’s largest broker of exchange-traded futures and options contracts. “The Fed is engaged full throttle. We would not be surprised to see a larger rate cut on Tuesday.”

The Fed reduced the rate on direct loans to commercial banks by a quarter-point to 3.25 percent and said it will allow primary dealers to borrow at the rate in exchange for a “broad range” of investment-grade collateral.

The central bank, in a statement yesterday in Washington, also extended the maximum term of discount-window loans to 90 days from 30 days. JPMorgan agreed to buy Bear Stearns for about $2 a share. The Fed approved the financing arrangement for the transaction.

To contact the reporter on this story: Wes Goodman in Singapore

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The Fed lowered the discount rate to 3.25 percent from 3.5 percent, and extended the maximum term of discount-window loans to 90 days from 30 days. JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $2 a share, following a bailout plan backed by the Fed.

The dollar fell below 97 yen for the first time in 12 years and slumped to a record low against the euro. Gold typically moves in the opposite direction to the dollar as a decline in the currency boosts the appeal of bullion as a haven to store value and makes dollar-denominated gold cheaper for holders of other currencies.

“All the markets are in a real panic right now and I don’t think there’s anything to stop gold’s rise given the flight to safe haven assets,” Wallace Ng, chief trader for precious metals in Asia-Pacific at Fortis Bank, said from Hong Kong today by telephone.

Bullion for immediate delivery climbed to as much as $1,032.70 an ounce, and traded up $19.95, or 2 percent, at $1,022.90 an ounce at 11 a.m. Singapore time.

Gold for April delivery gained to a record for a most-active contract, rising as much as $34.40, or 3.4 percent, to $1,033.90 an ounce in after-hours electronic trading on the Comex division of the New York Mercantile Exchange. The contract stood at $1,024.50 an ounce at 11 a.m. Singapore time.

“What the Fed did reflects how serious the situation is right now and I won’t be surprised if gold gains another $100 this week because of all the financial turmoil and the uncertainty surrounding the U.S. economy,” said Ng.

Nineteen of 25 traders, investors and analysts surveyed from Melbourne to Chicago on March 13 and March 14 advised buying gold. Two said to sell and four were neutral.

By Glenys Sim

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US gold futures surged past the historical level of 1,000 US dollars an ounce on Thursday, as panicking investors reacted to fresh lows for the US dollar and soaring oil prices.

Gold soared above 1,000 US dollars per ounce for the very first time on Thursday, a new milestone in futures trading, prompting many investors to enter the bullion market.

The price of gold has jumped nearly 20 percent since the start of the year, after rising nearly 32 percent in 2007. The huge advance is mainly the result of a weaker dollar and record-high prices in crude oil. The dollar fell below 100 yen Thursday for the first time in 12 years and hit another new low against the euro, while oil traded above 110 dollars a barrel.

Many industry insiders say that if the dollar continues to weaken, bullion could rise even further, as more investors turn to gold as a hedge against inflation. But prices could retreat in the short-term due to profit taking.

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