Oil Falls as Dollar's Gains Reduces Appeal as Inflation Hedge

By Nesa Subrahmaniyan and Gavin Evans

July 14 (Bloomberg) -- Crude oil fell for the first time in four days in New York as the dollar advanced, reducing the commodity's appeal as a hedge against inflation.

Oil dropped after the dollar rose from a two-month low against the euro as U.S. Treasury Secretary Henry Paulson said he will seek approval to buy stakes in and lend to Freddie Mac and Fannie Mae, the nation's largest mortgage financiers, to help stem a slump in the housing market. Oil has gained 50 percent this year as the sliding dollar and falling U.S. equities prompted investors to buy commodities.

``There's probably a general view that the dollar is close to bottoming, and that we could see some firmness in the coming months,'' Mark Pervan, a senior commodity analyst at Australia & New Zealand Banking Group Ltd. in Melbourne, said in a Bloomberg Television interview. ``The market is very news-sensitive'' and any decline in the dollar or threats to supply will send oil prices higher, he said.

Crude oil for August delivery fell as much $2.59, or 1.8 percent, to $142.49 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $143.63 at 9:36 a.m. in Singapore.

The contract jumped to a record $147.27 on July 11 after the dollar fell and the Jerusalem Post said Israeli war planes practiced over Iraq for an attack on Iran's nuclear research facility. Israel denied the newspaper's report and oil settled at $145.08, a gain of 2.4 percent on the day.

The dollar climbed after Treasury Secretary Paulson's announcement, and traded at $1.5896 per euro at 9:32 a.m. in Tokyo, from an earlier low of $1.5971, and $1.5938 in late New York trading July 11. The dollar touched an all-time low of $1.6019 on April 22.

Demand Risk

While high prices are curtailing demand, there has been a noticeably lagged affect, ANZ's Pervan said. Oil may have to reach $175 a barrel, where it will be at a record relative to GDP expenditure, before the global economy reacts.

``At that point we could see some real demand erosion,'' he said. ``Somewhere between $170 and $180 we could see a pull back.''

Brent crude oil for August settlement fell as much as $1.99, or 1.4 percent, to $142.50 a barrel on London's ICE Futures Europe exchange. The contract, which expires July 16, reached a record $147.50 on July 11.

The more widely held September contract fell $1.27, or 0.9 percent, to $144.30 a barrel.

To contact the reporters on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net; Gavin Evans in Wellington at gavinevans@bloomberg.net