Copper Drops as Dollar, Oil Reduce Demand for Inflation Hedge

By Glenys Sim

Sept. 9 (Bloomberg) -- Copper slipped in Asia after rising from a seven-month low yesterday, as the U.S. government's seizure of lenders Fannie Mae and Freddie Mac boosted the dollar, eroding demand for raw materials as a hedge against inflation.

Futures fell as crude oil also declined and after the dollar strengthened to the highest since October 2007 yesterday as the bailout boosted confidence in the world's largest economy. Copper has fallen 6.5 percent in the past month as the dollar gained 4.9 percent against a weighted basket of six currencies.

``The U.S. government's decision on the weekend to take control of Fannie Mae and Freddie Mac was seen as supportive for the U.S. economic outlook, and so was a positive factor for base metals prices,'' David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney, said today in a report. ``However, the firmer tone of the U.S. dollar against the euro worked in the opposite direction.''

Copper for delivery in three months declined 0.5 percent to $6,918 a metric ton on the London Metal Exchange, after rising yesterday from $6,852 a ton, the lowest since Jan. 23.

November-delivery copper fell as much as 0.9 percent to 54,650 yuan ($7,991) per ton, before trading unchanged at 55,160 a ton on the Shanghai Futures Exchange at 11:23 a.m. Singapore time.

The dollar traded at $1.4109 per euro, firmer than $1.4128 in New York yesterday, when it rose 1.5 percent to touch $1.4054, the strongest since Oct. 9. The stronger dollar also weighed on oil with the contract for October delivery falling as much as $1.24, or 1.2 percent, to $105.10 a barrel and traded at $105.23 at 11:29 a.m. Singapore time on the New York Mercantile Exchange.

Gains Ahead

``In the short-term we believe recent extreme volatility is likely to continue, we also believe prices could re-challenge previous highs before year end, particularly if further supply problems materialize,'' Morgan Stanley analysts led by Hussein Allidina wrote in report e-mailed yesterday.

Copper prices are expected to rise again in this year as Chinese buying accelerates and warehouse stocks become very tight again as Chinese consumers restock over the next six to nine months, ``with the expected stimulus/reflationary package resulting in a re-acceleration in growth,'' Allidina wrote.

Among other LME-traded metals, aluminum was down 0.3 percent at $2,642 a ton and zinc fell 1.7 percent to $1,740. Lead, nickel and tin had not traded as of 11:23 a.m. in Singapore.

To contact the reporter for this story: Glenys Sim in Singapore at gsim4@bloomberg.net