Plummeting oil boosts dollar as emerging stocks slump

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Hurricane Gustav's fading winds prompted a large selloff in oil to around $105 a barrel on Tuesday, helping boost the dollar to 10-month high against major currencies, while political risk shook emerging markets.

European stocks gained, but emerging markets fell to a near 18-month low on economic worries and concerns about Thailand following Prime Minister Samak Sundaravej's declaration of a state of emergency.

Oil was undergoing a relative rout, with the price of New York crude down nearly $10 a barrel at $105.64, a level last seen about five months ago.

A weakened Hurricane Gustav, now downgraded to a tropical storm, spared major oil facilities in the U.S. Gulf.

"There is another month of peak hurricane season to go, and there will be other threats," Michael Wittner, global head of oil research at Societe Generale, said in a research note.

"However, the market reaction to Gustav has confirmed our opinion that when the disruption threats fade, the underlying factors (for oil) are bearish."

The fall combined with an ongoing trend to dump European currencies on a souring global growth outlook, lifting the dollar to a 10-month high against major currencies.

The dollar index .DXY, a gauge of its performance against six major currencies, climbed around 1.2 percent to 78.075. The euro slid 0.7 percent to below $1.45.

Britain's pound also continued to get a drubbing on the UK's poor economic outlook, falling 0.8 percent to $1.7863.

"No one wants to catch a falling knife, and sterling is that falling knife," said Divyang Shah, chief strategist at Commonwealth Bank of Australia.

EMERGING SLIDE

The decline in oil prices and the euro's slide boosted European exporters, lifting the FTSEurofirst 300 index up around 0.7 percent.

But economic and political woes battered emerging market shares.

Emerging stocks as measured by MSCI's benchmarket sector index .MSCIEF fell to their lowest level since March 2007.

Thai Army chief Anupong Paochinda said he would not use force to evict protesters occupying the prime minister's official compound despite a state of emergency giving him the power to do so.

Central banks in Malaysia, India and elsewhere in Asia defended their weak currencies.

"Central banks are trying their best to stop the flood of outflows," a trader in Singapore said.

In South Korea, where the won has been plumbing multi-year lows, the authorities restricted their efforts to meetings and warnings. The won dropped to a 4-year low against the dollar with investors concerned about a flight of capital from Asia's fourth-largest economy.

Euro zone government bonds were lower, with 2-year yields rising to 4.093 percent and 10-years up tp 4.183 percent.

(Additional reporting by Naomi Tajitsu)