Oil falls as dollar strengthens against euro, yen

[August 26, 2008]  HAVANA, Cuba (AP) -- Oil prices slumped below $113 a barrel Tuesday as gains by the U.S. dollar against other major currencies pulled investors away from commodities and outweighed concerns Hurricane Gustav may disrupt oil operations in the Gulf of Mexico.

By midday in Europe, light, sweet crude for October delivery was down $2.17 to $112.94 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 52 cents overnight to settle at $115.11 a barrel.

In London, October Brent crude retreated $2.68 to $111.82 a barrel on the ICE Futures exchange.

While oil prices initially rose earlier in Tuesday's session due to the fears over Hurricane Gustav, they began falling markedly as the dollar strengthened.

"Lately, there has been a very strong correlation between oil futures and the U.S. dollar," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Oil prices typically fall when the dollar strengthens as investors buy commodities as a hedge against inflation and weakness in the U.S. currency.

The euro fell below $146 Tuesday, a six-month low. By midday in Europe, the 15-nation currency stood at $1.4594, more than 1.5 cents below the $1.4756 it bought in late trading Monday in New York.

At the same time, the dollar gained to 109.78 Japanese yen compared with 109.35 Monday.

Tropical storm Gustav became a hurricane Tuesday as it approached Haiti's southern coast, and is also on track to hit Cuba.

"It's hard to predict where Gustav will strike," Shum said. "But the market is reacting to it and edging up some."

The National Hurricane Center in Miami said the hurricane's maximum sustained winds were near 80 mph (130 kph).

Haitians were told to prepare for evacuations as the storm formed Monday in the Caribbean. Haiti upgraded storm warnings to hurricane warnings along much of its coast as Gustav closed in from the south.

Forecasters said storm preparations in Haiti should be rushed to completion and that floods and landslides were possible across its southern peninsula. The forecasts suggested Gustav's eye could pass near the capital of Port-au-Prince, home to nearly 3 million people.

Traders worried that the hurricane could head into the Gulf, where there are many oil drilling platforms. The storm was centered about 130 miles (210 kilometers) south-southeast of Port-au-Prince and was moving toward the northwest near 12 mph (19 kph).

In other Nymex trading, heating oil futures fell 2.23 cents to $3.1291 a gallon, while gasoline prices lost 3.24 cents to $2.8499 a gallon. Natural gas futures increased 12 cents to $7.945 per 1,000 cubic feet.

[Associated Press; By PABLO GORONDI]

Associated Press writers Alex Kennedy in Singapore and Matt Moore in Frankfurt contributed to this report.

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