Our mantra of late has been that the serial bailout plans from the Treasury and Fed will undermine the US’s AAA rating and exact a considerable toll on the dollar. Indeed, Liam Halligan tells us in the Telegraph today that “Default by the US government is no longer unthinkable.”

Bloomberg reports that this view is on its way to becoming conventional wisdom among traders. And trashing the dollar will have decidedly nasty effects of food and energy prices, further pressuring an already deteriorating economy.

From Bloomberg:

Treasury Secretary Henry Paulson’s plan to end the rout in U.S. financial markets may derail the dollar’s three-month rally as investors weigh the costs of the rescue. The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates. “As we get to the other side of this, the dollar will get crushed,” said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world’s biggest currency hedge-fund firm, which manages about $15 billion. The dollar fell against 14 of the world’s most-traded currencies on Sept. 19, including the euro, as Paulson unveiled the plan, while the Standard & Poor’s 500 Index rose 4 percent….

Yves here. A peppy stockmarket and falling currency are not an unheard-of combination. Reader Scott has pointed out more than once as the Zimbabwe dollar has collapsed, its stockmarket has performed spectacularly in local currency terms.