Oil, Gold, Crops Drop as Stronger Dollar Cuts Commodity Demand

By Grant Smith

July 23 (Bloomberg) -- Crude oil, precious metals and crops fell as a stronger U.S. dollar limited the appeal of commodities as a hedge against inflation.

Oil dropped for a second day, capping a 15 percent slide from a record $147.27 a barrel on July 11, as the dollar strengthened and gasoline demand fell. Gold traded close to its lowest in a week and corn neared a two-month low as expectations of higher interest rates supported the U.S. currency.

``Oil and some other commodities are down on the back of the dollar,'' said Mike Wittner, head of oil research at Societe Generale in London. ``Also, general pessimism about the economy has caused the market to refocus on the demand outlook.''

Crude oil for September delivery fell as much as $2.25, or 1.8 percent, to $125.70 a barrel, and traded at $126.10 at 1:25 p.m. London time on the New York Mercantile Exchange. The August contract expired yesterday after declining 2.4 percent to $127.95 a barrel, the lowest settlement since June 5.

The dollar rose to a four-week high against the yen after Treasury Secretary Henry Paulson voiced support for the currency and the president of the Federal Reserve Bank of Philadelphia said interest rates should be raised.

The dollar rose to 107.77 yen as of 6:37 a.m. in New York, from 107.33 in New York yesterday. It appreciated to $1.5745 per euro, from $1.5783 yesterday.

The UBS Bloomberg Constant Maturity Commodity Index, which tracks 26 raw materials, gained 29 percent in the first half of the year as the U.S. currency retreated 7.4 percent. The index has fallen 7.1 percent this month as the dollar has stabilized.

Hurricane Dolly

Oil also declined on forecasts that Dolly, a hurricane in the Gulf of Mexico, will miss rigs in the region, which accounts for 25 percent of U.S. crude production. Dolly approached to within 100 miles (160 kilometers) of the coasts of northern Mexico and southern Texas with winds of 80 miles per hour, according to the National Hurricane Center.

``The downside for oil is somewhat limited as we are at the beginning of the hurricane season, and it's predicted to be an above-average season,'' said Andy Sommer, an analyst with HSH Nordbank in Hamburg. ``We are telling our customers to live with $130 until the end of October.''

Gold for immediate delivery dropped to $932.45 an ounce in London, the lowest since July 10, and corn for December delivery slid to $5.8125 a bushel, the lowest since May 30. Platinum fell $28.50, or 1.6 percent, to $1,780 an ounce, an eighth consecutive decline.

Agricultural commodities also declined. Wheat for September delivery dropped 1.6 percent to $7.84 a bushel at 1:13 p.m. London time, down 42 percent from a record $13.495 on Feb. 27.

Gasoline Stockpiles

Soybeans for November delivery tumbled as much as 36 cents, or 2.5 percent, to $13.81 a bushel and traded at $13.825 as of 1:14 p.m. London time.

The U.S. Energy Department is scheduled to release its weekly report on crude and fuel stockpiles today at 10:35 a.m. in Washington.

U.S. gasoline demand fell 3.3 percent last week from a year ago, the 13th consecutive weekly decline, as Americans react to record pump prices by driving less, a MasterCard Inc. report yesterday showed.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net.