USD vs Treasuries Bailout Plan

The credit crisis triggered by the sub-prime meltdown has finally taken its toll on Bear Stearns, Lehman Brothers and Merrill Lynch, which were all top 5 investment banks in the USA. AIG, the insurance giant, has also been bailed out on the brink of its collapse by the Fed's US$80 billion. The collapses were triggered as banks and financial institutions are not willing to lend money to each other worrying their own survival and thus, corporate debt cannot be paid.

So, how does the US$700 billion bailout plan would work? Here's a rough rundown of Fed and Treasuries plan on how it is suppose to work out.

• The US$700 billion will come from issuing of debt to other countries in the form of treasuries debt/bonds. Issuing debt reduces the appeal of one currency and thus will depress the value of US Dollar in the short term. "Only short term?", you may ask, I will address that in the next few points.
  
• The money is intended to buy all the illiquid mortgage assets from banks or financial institutions. Buying all the illiquid assets at fire-sale/market prices gives market some confidence that will soon drive up the values of these assets. Note that the money is used for expenditure (unlike the usual Treasuries debt), but for investments on these mortgage assets with potential returns.
  
• As the illiquid assets are bought by fed/treasuries, banks will receive cash with which they can start lending again and therefore relieving the credit market conditions over time.
  
• When market has recovered, the securities are then sold again at a profit giving good return to Fed/Treasuries/taxpayers.
• The profit can then be used to reduce US Fed/Treasuries debt which mean strength for the USD.
  

Over the short-term (next 6 months - 1 year), it'll have negative impact on USD but good long-term outlook for the USD on these basis when the market recovers.

Note: of course there are a lot of other variables needs to be taken into account for the USD to strengthen. The view is based on current sentiment and market condition and should it stay unchanged over the interval mentioned.